“Do you know what investing for the long run but listening to market news every day is like? It’s like a man walking up a big hill with a yo-yo and keeping his eyes fixed on the yo-yo instead of the hill.” — Alan Abelson
There is a perception among many investors that stock market volatility has increased. Because investors dislike volatility, such an increase could scare investors away from stocks. And, in fact, participation in the stock market is at a multi-decade low at about 50 percent. This perception of heightened volatility, along with research demonstrating that low-volatility stocks have provided higher risk-adjusted returns than high-volatility stocks, has led to an increased supply of low-volatility mutual funds and a dramatic increase in their assets under management. Just since 2011, more than 20 low-volatility stock funds and ETFs have been introduced into the market.
Kenneth Washer, Randy Jorgensen and Robert Johnson, authors of a new study, The Increasing Volatility of the Stock Market?, which was published in the Summer 2016 issue of The Journal of Wealth Management, examined data for the period from 1926 through 2014 to determine whether the perception of heightened volatility was accurate. The following is a summary of their findings:
- When returns are measured on a monthly basis, volatility (as measured by the standard deviation of returns) has not really changed since about 1940.
- The trend line shows that monthly volatility was slightly less than 4 percent in 1940 and slightly greater than 4 percent in 2014.
- However, when measured on a daily basis, volatility has more than doubled, with that trend beginning around 1970. Daily volatility was less than 0.5 percent in 1940. It had risen to more than 1 percent in 2014.
- When only downside volatility was considered (investors are often primarily concerned with downside volatility), the results were the same. Daily volatility has increased, but there has been no trend in monthly volatility.
The authors concluded: “These results suggest that investors would be wise to ignore daily fluctuations in the market and take comfort in the fact that, over longer holding periods, despite all the innovations in the market [such as high-frequency trading] that have led to a proliferation of trading activity, volatility really has not changed much.”
The Bottom Line
Mutual fund investors should focus on their long-term investment objectives and simply ignore the daily noise of the market. The following words of wisdom from legendary investor Warren Buffett serve as a fitting conclusion: “The most important quality for an investor is temperament, not intellect.”