Unless you’ve been living under a rock the past few weeks, you understand volatility has returned to the financial markets.
This should not be a huge surprise after positive returns every month in 2017.
However, to listen to the news media, the streets are littered with corporate carnage and gutters overflow with bankruptcies. This could not be further from the truth. In fact, the economy is doing quite well and corporations are benefitting.
Make no doubt, the recent volatility was some of the highest we have ever seen in terms of total point moves. In fact, during a one-week period, the cumulative intra-day point change in the Dow Jones Industrial Average was an amazing 22,000 points. Cumulatively, that is an 85% change….in one week!
The volatility that would normally be expected once or twice a year is now being anticipated one or twice a week.
Making matters worse, rumors are swirling that the “volatility index” or VIX has been rigged in a manner allowing people with very sophisticated computers to manipulate indexes. This, in turn, is causing tremendous volatility in individual stocks.
Whether this manipulation is happening remains to be seen. However, greed is a powerful emotion. Anytime greed rears its ugly head flawed humans will try to take advantage—even if it is clearly illegal. Or, the emotion of fear will cause investors to make irrational decisions that undermine their logical long-term plans.
Whether it is a matter of assessing massive volatility or manipulation, it is enough to frustrate the average investor.
Given this, here are some suggestions to help in achieving your goals.
- Someone will always have a faster computer or trading system that will be several steps ahead of you. The average individual cannot outgun institutional computers. As such, don’t try. No one said you had to be a short-term trader.
- The average individual needs to identify specific time frames for their financial resources. Short-term emergency funds need to remain liquid at all times. Funds needed in 3 to 5 years can be allocated to fixed income assets. Only funds that can be left invested for long time frames should be considered for the stock market. In doing so, short-term blips become far less worrisome if stocks become bumpy.
- Long-term in our world is a minimum of 5 years—but preferably 10 or more years. We have no idea what will happen with a stock’s price over any short time frame. However, over a 10-year market cycle, a stock’s price will generally follow its sales and earnings.
- Time is the friend of the great company and the enemy of the mediocre one. Buying high quality companies allows you to be patient.
- When you invest in stocks, you take ownership in a business. Stop worrying about ticker symbols. I highly doubt any sane person really thinks that over a one-week period the logical value of HEB, Buc-ee’s or Academy legitimately fluctuated by 85%.
- Volatility is nothing new. Since World War II the stock market drops, intra-year, an average of 14%. The recent decline resulted in a 10% drop. This magnitude decline has happened in 50 of the last 72 years.
- Volatility is not risk. Risk is the permanent impairment of capital—losing your purchasing power. Volatility generally comes from trading because people can’t sit still.
- The recent volatility was made worse by investors using financial products that use borrowed money or unique financial contracts to double or triple the movement of a given stock, commodity or index. These products, often structured as ETF’s, ETN’s or ETP’s, are extremely hard to understand or accurately evaluate. However, brokerage firms and investment banks love these products because the fees are quite high. Anytime you can’t understand what you are investing in, don’t do it.
- Focus on the things within your control. You are in control of what you own and how you allocate your hard-earned assets. Be a long-term investor, not a day trader or gambler. Today’s gambler is tomorrows bankruptcy.
The Typical Investor Does This
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……don’t be the typical investor
