Volatility in stock market creates opportunity

There is no denying that the kind of volatility the stock market has experienced over the last couple of weeks can cause anxiety in even the coolest, calmest investor. And if the volatility itself isn’t enough to unnerve the investor, then the 24-hour news cycle’s shrill and incessant coverage was certainly sufficient to do so. But is all this anxiety really warranted?

Volatility explained

Formally defined, volatility is a statistical measure of the dispersion of returns for a given security or market index. So when the media discusses market volatility, it is essentially talking about how much stock prices are moving up and down. High volatility means prices are moving up and down quite a bit, and when it is low, there is steadier fluctuation.

There are even volatility indexes that show the market’s expectation of 30-day volatility. The VIX (the trademarked ticker symbol for the Chicago Board Options Exchange Volatility Index) tracks the S&P 500, is forward-looking and is often referred to as the “investor fear gauge.” For the past six months, the VIX has not closed at more than 20.00 (which represents an expected annualized change in the S&P 500 of less than 20 percent over the next 30 days). It peaked on Aug. 24 at 40.74, and fluctuated the first half of this week in the mid-20s to low-30s range.

The good and the bad

Volatility is largely unpredictable. It’s often fueled by fear. It makes headlines. But is it bad? With more movement in the market, there is a wider range of possible outcomes — some of it loss, yes, but some of it reward. If movement is less dramatic and more consistent, there is less possibility for reward. While the downside increases, so does the upside. And as with any investment, the riskier it is, the greater the possible returns.

Risk and reward

For any millennial reading this, here is a non-market example that might help you better understand volatility. Let’s say you’re a college graduate and are a couple of years into a career. Now that you’ve seen what it takes to advance in your field, you’re considering graduate school. If you decide to do this, there is a possible range of outcomes: You could turbo-charge your career and make more money, or it could end up not being as advantageous as you hoped and add debt that will take years to pay down. What’s it going to be? Don’t go, take on no more debt and not speed up your career progression? Or go, risk the debt and possibly accelerate your career?

The emotion of investing

The upward trendline of the S&P 500 is not perfectly smooth. There are spikes and dips, some larger than others, that traverse the line. There is no way to predict when a decline is going to happen. Because technology has created an around-the-clock stream of news, what is happening in the market is often hyped, overhyped and hyped some more. Yes, we did have a big drop, but the media only exacerbated the problem by turning it into a frenzied, self-fulfilling prophecy. It can be easy to get wrapped up in the emotion of what is happening.

The worst thing investors can do is let those feelings get the best of them. Always remember the basic rule of investing — buy low, sell high — along with a corollary: Over time, the market moves higher. Many investors have the 2008 financial crisis still at the forefront of their minds, but that is a “black swan” type of event that doesn’t happen regularly. And the all-time market high at the time (the S&P 500 was at 1,561.80), which the crisis toppled, has been subsequently surpassed by more than 500 points. Thanks in part to volatility, even that dark time has become a blip on the historical radar screen.

Jennifer Pagliara is a financial adviser with CapWealth Advisors LLC, and a proud member of the millennial generation. Her column, which appears every other Saturday in The Tennessean, speaks to her peers and anyone else that wants to get ahead financially.