Uncommon Cents

The stock markets have been volatile the last couple of months. Three digit gains followed by three digit losses (at least as far as the too-closely-watched Dow Jones Industrial Average is concerned).

Volatility can be scary for investors. It shakes them up and makes them concerned that their investments are risky. There is risk in investing, no question; volatility magnifies the risk for investors, and the more closely an investor follows the market, the more scary volatility can be.

When someone says, “The stock market returns 10% a year,” it sounds very straightforward and linear, as in 10% this year, 10% next year, 10% the following year. However, that’s not the way it works; some years you have incredible gains, like 40%; some years, you have almost no gains; and some years, you have negative returns, like in the bull market years of 2000, 2001, and 2002. If you look at a graph of the stock market performance of, say, 1984 until now, the curve looks mostly like an upward sloping line, with a few dips. The dips don’t look all that pronounced, but they include the horrible early 21st century bear market and some significant falls along the way.

The point of all of this is that while day to day volatility in the stock market can be quite scary, perspective is important–the perspective of, say, 20 years time. Don’t let volatility scare you; keep in mind the long term goal and do the smart things of investing–diversify, asset allocate, dollar cost average, and keep your fees low. And don’t look too closely, before the emotion attached to the volatility has you do something that isn’t so smart with your investments.

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