The Investor and Market Volatility

Looks like the bulls are tired of running. Global markets saw a significant decline in the month of May due to rising global interest rates and falling commodity prices. Rising interest rates makes stocks less attractive and bonds more attractive. Consequently, money flows out of the stock market and into the bond market, which results in a decline in the stock market.

Not a day goes by where in the words 'volatile' or 'volatility' are not used in the daily business news. Volatility is a characteristic of a security or market to rise or fall sharply in price within a short-term period. Mathematically, volatility is the annualized standard deviation of returns.

After listening to market analysts talking on business news and after reading news articles, the impression that a small investor like you and me will come out with is that a volatile stock market is bad. The reason given for this is that it is difficult to predict where the market is heading in the short-term so it is better to stay out of it (i.e. sell what you have!)

One thing I have learned over the years is that you never sell just because the market (or stock) has gone down and never buy just because the market (or stock) has gone up. Reasons to buy or sell need to be stronger than that.

If you're in the stock market for the long-term, then selling in a volatile market can be the worst action you can take for the following reasons:

1. Loss of income (if the stock is dividend paying).

2. Panic could set in due to falling prices and thus selling will result in a spectacular profit becoming a mediocre profit or even a loss. Stocks should only be sold following a rational argument.

So my dear investors, do not be afraid of volatile markets. Do not let your emotions control you - just hang in there. If you are feeling courageous, it might even be smart to buy on the dips. Remember that you can always say "no" to Mr. Market!

Tags: Volatile Volatility