We understand that big market swings make investors nervous. We have received several questions about the current condition of the stock market and market volatility in particular. To answer those questions, we like to discuss the meaning of “volatility” and explain that volatility is not the same as risk.
What is volatility?
The word “volatility” is defined as “The tendency to change rapidly and unpredictably, often for the worst.” Certainly, we do tend to worry about investment volatility when there is a rapid decline in the stock market as we have seen recently. Yet, volatility can be used positively as well. Compare these recent headlines from the Wall Street Journal:
December 1, 2021 – “U.S. stocks fell in a volatile trading session Wednesday, dragged down by news that the first known case of the Omicron variant was identified in the U.S.”
December 2, 2021 – “U.S. stocks jumped Thursday, continuing a tumultuous week for markets driven by uncertainty about the potential impact of the Omicron variant on public health and the economy.”
January 24, 2022 – “Stocks Rocket Back to Finish Higher After Deep Slump. Major U.S. stock indexes registered a massive comeback Monday to close higher after the Dow industrials were down more than 1,100 points at midday.”
Volatility and risk are not the same.
Risk is what an investor takes when entering the stock market or investing in a private placement fund. Investment risk is potentially being wrong about the solidity of the investment. Investment diversity helps manage risk. For long-term investors with a diversified portfolio, risk is spread out over a wide range of securities. Therefore, with investment diversity, volatility matters less for long-term investors who understand that volatility is inevitable but often short term.
“TINA”–in case you are unfamiliar with this term, it is an acronym which stands for “there is no alternative”. With rising inflation and the extremely low interest rate return from money-market funds, investors looking for higher returns see the stock market as their only alternative. At SWP, we do not invest in the stock market just because “TINA”. At SWP we do, however,maintain a long-term investment approach, creating an investment portfolio to include a variety of quality securities.
As we stated in our last client letter, Strategic Wealth Planning will continue to monitor the markets and make required changes to meet our objectives of return, risk reduction, and liquidity.