With a rocky start to 2022, the stock market movement can cause anxiety for even the coolest, calmest investor. And if the volatility itself isn’t enough to unnerve the investor, then the 24-hour news cycle’s incessant coverage will certainly suffice. But is all this anxiety warranted?
So what is volatility, anyway?
The formal definition of volatility is a statistical measure of the dispersion of returns for a given security or market index. So when the media discusses market volatility, they are essentially talking about how much stock prices are moving up and down. High volatility means prices are moving up and down quite a bit, and when it is low, there is steadier fluctuation.
There are even volatility indexes that show the market’s expectation of 30-day volatility. The VIX (the trademarked ticker symbol for the Chicago Board Options Exchange Volatility Index) tracks the S&P 500 Index, is forward-looking and is often referred to as the “investor fear gauge.” For the past six months, the VIX has ranged from as low as 15.01 in October 2021 to peaking at 31.96 on Jan. 26.
As you probably guessed, the VIX peaked over the last five years in March 2020 at 66.04 during the beginning of the pandemic in the United States, when fear of the unknown was at its highest.
So why is volatility a good thing? With some volatility, there is a wider range of possible outcomes. If volatility stays consistent, there is less possibility for reward. While the upside increases so does the downside. And as with any investment, the riskier it is, the greater the possibility of return.
What is a correction?
A 10% drop in the market is considered a correction. The S&P 500 Index did cross that threshold in January but has rebounded since. What most investors don’t realize is that a 10% correction is normal about every 18 months to 2 years. We haven’t had this type of market movement since March 2020 and the beginning of the pandemic.
Watch emotions while investing
The trendline of the S&P 500 Index is not a perfectly smooth one. There are dips, some larger than others, that traverse the line. There is no way to predict when a decline is going to happen. Because technology has created a 24/7 constant stream of news, the hype of what is happening in the market is often played up. Yes, we did have a big drop, and it can be easy to get wrapped up in the emotion of what is happening.
The worst thing that an investor can do is let those feelings get the best of them. Always remember the basic rule of investing: buy low, sell high. Year to date (as of Feb. 7) the S&P 500 Index has a negative return of 5.92%. But if you based all your decisions on a snippet of time in the market, we would most likely make the wrong decisions. The S&P 500 Index has been averaging 10% per year since the 1950s, so remember fluctuation is just a blip on the radar and that volatility is not the enemy.
Jennifer Pagliara, CFP, CTFA, is an executive vice president and financial adviser at CapWealth and a proud member of the millennial generation. Her column speaks to her peers and anyone else that wants to get ahead financially. For more information about Pagliara, visit capwealthgroup.com.