Volatility is Misunderstood
This headline in an article in the Financial Post is typical: Are quiet markets gearing up for a burst of volatility?
The import of this article, and others, is that stock market volatility is both unusual and bad.
Neither is true. Here’s why.
Over the past 30 years (through the end of 2017), stocks in both the U.S. and Canada had an average intra year decline of about 13%. Yet, the annualized returns of the S&P 500 and the S&P/TSX 60 during that period was 10.7% and 9.0%, respectively.
Clearly, there’s nothing unusual about stock market volatility, and it doesn’t necessarily portend negative results for investors. No one complains about market volatility when stocks go up. No articles tell you how to cope 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 were no volatility, the expected returns of stocks would be equivalent to low-risk investments, like Guaranteed Investment Certificates.
Volatility is a positive factor for investors. The risk inherent in market volatility is the source of stock market returns. Instead of fearing market volatility, you should understand it demonstrates the resilience of the stock market. Historically, the market has survived major corrections, recessions, geopolitical uncertainty, and armed conflicts.
At the Danielson Group, we understand market volatility. We incorporate it into our investment planning process.