The Give and Take of Volatility

Here’s a look at all the daily changes of the S&P 500 over the last five years:

I’ve said before that volatility is used incorrectly as a scare word by many in the financial media. Volatility is rarely good or bad, especially if you’re focused on the long-term as we are. In fact, I prefer a little volatility since it helps us spot bargain stocks.

What the chart shows us — and what to keep in mind — is that volatility comes and goes. I’m not trying to sound flippant or dismissive; the numbers back it up.

We had very little volatility before the financial crisis; then we had historic volatility. Since then, volatility has flared up twice, once in the summer of 2010 and again last summer. That latest flare-up is still going, but I suspect it’s rapidly fading.

There wasn’t a single move, up or down, greater than 2.3% between September 2, 2010 and August 1, 2011. Since August 2nd, there have been 25 such moves. Like the others, this too shall pass.

I think the best way to look at volatility is as a struggle in the market for competing theses. The sharper the conflict, the greater the volatility. Once the market settles on a theme, then stability quietly returns.

Posted by on December 28th, 2011 at 1:34 pm


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