There’s no doubt the world is seeing its share of trouble right now, from a China slowdown to continued recession in Europe to geopolitical unrest in the Middle East.
But Dan Wiener, the editor behind the Independent Adviser for Vanguard Investors, says folks shouldn’t panic — even if the Dow Jones Industrial Average is seeing 100-point moves fairly regularly in the past few weeks.
After all, volatility cuts both ways.
Wiener points out that a specific Wall Street Journal headline recently referred to “global tumult” — published, of course, a day after the Dow fell more than 100 points.
“The real ‘tumult’ being worried about here seems to be tumult on the downside,” Wiener wrote recently. “I don’t recall ever seeing articles worried about worrisome volatility when the markets are moving up.”
He goes on to make the following observations:
“Since the Fed’s last meeting on May 1 (inclusive) the average daily move in the Dow has been +0.07%. If you average just the losing days, the average loss on the losing days was -0.51%.
Now, let’s just go one month earlier, to April 2013. The average daily move in the Dow for the month was +0.08% (1 bp higher), but the average loss on losing days in the month was -0.45% (a lesser amount of 6 bps from the May through yesterday period.)
For the entire year through the end of April the average loss on losing days was -0.45%. The average loss on losing days for the entire year through last night: -0.47%, a whopping 2 bps difference!
In other words, what I would call the ‘worrisome volatility’ which is volatility that investors seem to care about (the stuff that loses money, not makes money) has been barely different for the period from the date of the Fed’s last meeting than from the year in its entirety. The markets have yet to show increased volatility in real money-losing or money-gaining terms. It’s just the raw ‘points’ numbers that are getting bigger.
Now, this isn’t to say the short-term doesn’t hold challenges or that the trend can’t change. But keep in mind that Dan Wiener is a long-term investor. His Independent Adviser for Vanguard Investors focuses on the best funds for investors looking for long-term gains in diversified investments, and he has a great track record of beating the market over time.
Swing traders obviously care much more about the day-to-day gyrations of the market, and time horizon is everything.
If you’re a longer-term investor, it’s worth looking at the numbers in context. And as Wiener rightly points out, the triple-digit moves haven’t resulted in a sustained downtrend for stocks, and on a percentage basis they’re hardly as compelling.
Big deal, indeed.
- Get more of Dan Wiener’s insights via his FREE e-letter about mutual fund investing. (Fund Focus Weekly)
- Of course, based on VIX options bets on volatility are approaching new highs. (Bloomberg)
- Volatility has entered the building … but what does it mean for traders? (InvestorPlace.com)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.