If you pay attention to the financial media (which you shouldn’t do), you’d think “volatility” was a bete noir for investors.
Here’s one of many examples, from Consumer Reports: Stock Market Volatility: 5 Moves to Keep Your Investments on Track.
The import of this article, and others, is that stock market volatility is (a) unusual and (b) bad.
Neither is true. Here’s why.
Volatility is normal
For the period from 1979-2017, the US stock market had an average intra-year decline of 14%.
About half of those years had declines exceeding 10%. Approximately one-third of those years had declines of more that 15%.
Clearly, there’s nothing abnormal about stock market volatility.
Volatility isn’t “bad”
Wide fluctuations in the market don’t always portend problems for investors.
In 33 out of 39 years examined (discussed above), calendar year returns were positive.
Investors who ignored market volatility and did nothing were rewarded.
Volatility is misunderstood
No one complains about market volatility when stocks go up. There are no articles telling you how you should deal with a sharp increase in the value of your portfolio.
Investors in stocks are rewarded for taking the risk of holding stocks instead of bonds. If there was no volatility, there would be no risk in holding stocks, and the expected returns of stocks would be equivalent to “risk free” investments, like bonds guaranteed by the full faith and credit of the US government.
This quote is an excellent summary of how you should view market volatility:
The market has gone through decades of wars, recessions, economic booms, bouts of hyperinflation, civil unrest, and natural disasters…..and they have proven their resilience. In fact, risk is the source of stock market returns. If there were no risk, there would be very low returns. – Tom Allen and Becky Vasquez, Index Fund Advisors
Resource of the week:
This article by Tom Allen and Becky Vasquez nicely puts market volatility in perspective.