What does volatility mean to you?
Country Routes - September, 1997
What does volatility mean to you and why is it something you should consider? Let me use a few recent examples to illustrate the point.
Some people are calling it the 1997 Bear Market ?? or the Bear Market that wasn't. It certainly was the world's fastest correction. Things got a bit scary in March and April, but the market turned around in a hurry. From a high of 817.66 at the end of February, the S & P dropped to 733.54 or 10.2% mid-April. By the beginning of May it was up 13.5% to a new high of 832.29. More recently, the week of August 10 saw the DOW retreat from 8031 to 7694, down over 5% capped off by a Friday that plummeted 247 points or over 3% in that single day -- its lowest close since June 30, producing a drop of 7.3% since it hit a record intra day high of 8299.49 August 6. Other broader market indexes also tumbled Friday, but not as steeply as the DOW. The TSE 300 dropped 71.76 points or more than 1% to 6695.09 for a loss of 200.06 points, or 2.9% on the week and 3.9% from its intra day high, also August 6.
Investors were worrying whether the stock market has changed direction after North American equities shuddered through a massive sell-off Friday that sent the blue-chip DOW reeling to its worst percentage loss in almost six years. This certainly frayed investors nerves who remembered a similar drop on Friday before the DOW dropped approximately 25% the following Monday, October 19, 1987. What would the following Monday bring? I was at our annual conference the following week at the Deerhurst Inn in the Muskokas and watched it recover 2.5%.
This tremendous volatility seems to have become a part of both stock and bond markets around the world. Moves in the widely watched DOW of 100 points are almost a daily occurrence, first in one direction & then in another. When Allan Greenspan makes a comment that the markets are experiencing "Irrational Exuberance" the reaction is often more violent. Some casual observers may react with fear, particularly on "down days". This is no cause for alarm. It is important that fluctuations in interest rates or stock market prices are a normal occurrence reflecting the ever-changing nature of business and the economy. A major influence is the business cycle, the ebb and flow, which has the effect of periodically purging excesses of all sorts from the system.
While central banks and governments attempt to mitigate the more extreme effects of the cycle, its powerful affect has not yet been repealed. As a result, it is a virtual certainty that interest rates will rise again at some point (perhaps soon) and equity prices will temporarily consolidate before moving higher. When will this occur? Nobody can say for certain -- given the general favourable economic conditions that prevail. It is also not something to be feared if you are a long-term investor with a balanced portfolio of the right mutual funds. Remember, the fund managers use such periods to advantage, since this is when the bargains appear in the market place. Moreover, keep in mind that the long-term economic fundamentals are excellent and here is where our focus should be.
So don't let market volatility deter you from your established investment goals. Volatility and risk go hand in hand. I wrote a two part series on Risk, June-July 1994. Call me for copies if you have not read them. Many people today who have their GIC's coming due are facing with renewing them at 3-5%. What is happening in today's markets is very intimidating for those who are used to a steady increase in their investments. But, like a client of mine told me recently when his GIC came due, "Where else am I going to put it? A 3-5% fully taxable return is something I cannot live with." After I explained the risks he said he understood them and said, "I am the one who signs the cheque." He assured me he took full responsibility for his decisions.
In this market environment one has to be fully informed by a professional who understands the risks and tells you both sides of the coin. So don't let this extreme volatility keep you on the sidelines. Talk to a professional who understands the nature of the beast and can properly explain it to you.
If you have any questions, please call Reg Borrow at (519) 855-6639. He is an Independent Financial
Consultant with Regal Capital Planners Ltd.
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