Following U.S. Federal Reserve Chairman Jerome Powell’s press conference in early December 2018, it would have been easy to think the stock markets were ready to ease into a tranquil holiday season and a slow start to 2019.
But that didn’t happen. Volatility roiled the markets, sending many investors into a panic.
This leads to the following questions: what is market volatility, and is it a reason to be concerned?
Market volatility is arguably one of the most misunderstood investing concepts. Formally defined, it’s the range of price changes a stock or market experiences over a period of time.
If the price is relatively stable, the stock or market is said to have low volatility; if the price moves significantly or erratically, the stock or market is said to have high volatility.
Volatility is often measured by the CBOE Volatility Index, known by its ticker symbol VIX, which gauges the market’s anxiety level. At a level near 20 as of this writing, the VIX is relatively low (less volatile market). It was in the 30s this past December; during the financial crisis in 2008-2009, it was in the 70s.
But volatility isn’t necessarily a bad thing.
Most investors focus on downside volatility because they feel a loss more acutely than they do a win. But volatility also provides opportunities for the patient investor. Each purchase or sale of a stock has the risk both of failure and of success.
Without volatility, there is less chance of either.