Up and Down and Up Again

“Fear of a name increases fear of the thing itself.”

— Albus Dumbledore, Harry Potter and the Sorcerer’s Stone (J.K. Rowling, 1998)

 

Perhaps you’re new to investing and are venturing into the market for the first time, or maybe you’re an “old hand” at investing and have a firm grip on the market’s foibles. No matter where you fall on the experienced/inexperienced spectrum, there’s nothing quite like rampant market volatility to strike terror into the hearts of investors.

 

At the midpoint of 2018, the markets have been characterized by the return of volatility, a phenomenon largely absent for the past several years. After years of a steadily rising market, investors are getting whipsawed one way, then another, with many contemplating a hasty exit from the dizzying rollercoaster ride. But take comfort, things are not quite as bad as they may seem.

 

To better acquaint you with the whys and wherefores of market volatility, we’ve created a short primer to help you navigate what thus far seems to be this year’s new normal.

 

Volatility Defined

 

For all the nomenclature attached to the term, market volatility is simply a way of measuring the inclination of the market to dramatically rise or fall in a brief time period. Volatility often creates wide-ranging price variations and potentially frenzied trading by professional investors. Volatility is measured by, what else, the Volatility Index, better known as the VIX, which predicts the market’s expected volatility over a 30-day period.

 

The VIX is often referred to as the “fear index.” At Emperor we think of it as the “opportunity index.” When the market drops, we feel as Warren Buffett puts it “like a mosquito in a nudist camp.” So many wonderful business are “on sale.”

 

There’s Nothing to Fear but Fear Itself

 

While prolonged volatility may have you reaching for a bottle of antacids (or wine), it isn’t anything of which to be afraid. It’s a completely normal occurrence triggered by a whole variety of macro events like trade wars, geopolitical issues, high unemployment rates, and just about anything else that spooks the markets. Though these events can often feel quite intense in the moment, some of them justifiably so, volatility is part and parcel of the market and a natural ebb and flow over time is to be expected.

 

Stick to Your Knitting

 

There’s an inclination among novice investors to sell out of their positions during volatile periods, then wait for the market to return to a state of calm before venturing back in again. This is understandable but is a huge error – one that could come at a ruinous cost. Securities rise and fall all the time – it’s what they do. Not even the savviest of professional investors know with any degree of certainty when to call the top of the market, nor the bottom, or what macro events may spawn volatility, so one would be wise to avoid trying this. Avoid obsessively checking your portfolio’s balance and remember that while volatility may not be your friend, it’s not your enemy either. So, when it knocks on your door, ignore the noise, batten down the hatches and ride it out.

 

Lemonade from Lemons

 

If volatility is a cloud, then the ability to buy securities at attractively discounted prices is the silver lining. If you’re investing for the long-term, such as retirement, you can likely purchase additional shares at a lower cost, reducing your average price per share. In time, this could serve you well if prices rise again and you can take some gains by selling off the appreciated stock.

 

Play the Long Game

 

The “long game” is often defined as having a long-term plan, long-term goals, or doing something in the present that could help you in the future. It can apply to any area of your life, including investing. If you’ve outlined the rationale for your investment journey and the reasons for embarking on it, odds are you’re going to weather any volatility that comes your way.

 

And, if you ever find yourself looking for the exit at the wrong time, simply refer to “stick to your knitting” above.”