Volatility - to change rapidly and unpredictably cultivating in big moves both up and down in the stock market.
I wrote this note to my clients this week. I thought I would share it with you.
Volatility is a word that is often thrown around in the financial media. Most people have sort of an idea as to what it means. When the market is all over the place, up one minute by a lot, and then down one minute by a lot, you would call that volatility. Yet, I think that most people don't fully understand it. For example, I received this text the other day:
"Market is nuts isn't it? Up 600 plus then down 100 points within a few hours."
"Actually, pretty standard for a bear market if this is one. It is just the volatility." - my reply
It is important to understand what volatility means. Volatility is a sign that things are about to get unpredictable. It is a sign that the market is recognizing uncertainty. Ultimately, uncertainty either gets resolved or volatility increases because uncertainty increases and won't go away. Ultimately, the uncertainty is more about resolving which direction the market is going to go (either up or down) over the next 12 months. Another aspect of volatility is time. The longer that the market is locked in a volatile market the more likely the direction of the market is about to change. Let me give you the tale of two markets.
Market One goes up over a long period of time. Then it stops going up and starts going up and down over a period of time. Ultimately the volatility settles down and then the market returns to going back up again.
Market Two goes up over a long period of time. Then it stops going up and start going up and down over a period of time. The volatility doesn't stop. It is both volatile going up and volatile going down. HOWEVER, the one big difference between Market One and Market Two is that Market Two mainly goes down over time.
The most important question is which market path are we on? Are we on market path 1 or market path 2? Remember the only difference between the two markets is that the volatility ultimately ends with Market One and volatility continues with Market Two with the market going down.
Volatility in and of itself is not a bad thing. It is a normal thing. HOWEVER, when it means that things are changing for the market, it can be a dangerous sign.
If you want to learn ways to limit the volatility and risk to your investment accounts, send me an email and I will show you what I am doing for my clients.