Oct 31st, 2008
The Only Thing That Can be Counted on is Volatility
October has definitely been a down month (in fact, it was mentioned by CNNMoney.com as one of the worst in the history of the stock market earlier this week). That said, the S&P 500 (which is the standard used here at Uncommon Cents when talking about “the market”, despite its flaws) then went on a total tear on Tuesday with one of its highest gaining days ever. On Wednesday, when this is being written, the S&P 500 closed down (not by a huge amount) but it was up most of the day–and in positive triple digit territory for quite a bit of that.
What’s going on here?
Volatility.
Volatility is a measure of how much risk is involved in an investment. Signs of volatility include large fluctuations in price. This can be evidenced by looking at the entire stock market at this point. While this month has been largely negative (and at least earlier this week measured among the most negative of all time), two of the biggest gaining days in the history of the stock market have also happened this month.
Volatility in the stock market is normal, and sometimes very high, although recently it’s been as high as I’ve ever seen it. While it’s possible for market timers to make money with such volatility, I don’t practice any attempt to do so (I don’t practice any form of market timing, and while I cannot give advice, I generally don’t think it’s a wise idea). Volatility can result in nervousness among investors, which is its largest negative. Remember–volatility in the stock market is normal, and to be expected. Investors tend to like volatility if the result at the end of the day is a positive gain and dislike it if the result is a loss. If you’re someone who gets nervous around market volatility, one of the things you can do is pay less attention to the results and just go on your merry way. If you can’t do that and you get exceedingly nervous, it could be that you just do not have the risk tolerance for stocks. Right now, this market is mostly down, sometimes up, and sometimes sideways, but the one thing we are seeing is lots of volatility. It can be scary, but it can also tell you more about your risk tolerance as an investor, and that can be a very important lesson.
