How to View Volatility

5/25/2010

Volatility is back. There is no question that the volatility index “the VIX” has risen in the last few weeks much higher than it has been in the past six months. It appears due to the uncertainty on the political, social, and economic agendas worldwide that volatility will be around for a while. Therefore, we must recognize that volatility is back and to brace for it. 

Volatility is not the same thing as market declines. Just because prices are volatile doesn’t necessarily mean that prices are falling. Volatility is a yo-yo. You can’t have volatility unless prices also go up! A bear market is when prices go down. A bull market is when prices go up. A Volatile market is when prices do both. Volatility is a double-edged sword. Just need to recognize the environment we’re in. Brace ourselves and weather the storm.

If you don’t have the stomach for it, consider reducing risk now. Review your asset allocation. Speak to your financial advisor to see if your investments are properly allocated. This is not a recommendation to time the market. It is about knowing who you are, what your goals are, and what your stomach for risk is.

If you need the money in the next few years, you should not be in the stock market at all.

Volatility presents a fabulous opportunity to create long-term wealth. If you’re adding to your investments (or dollar-cost averaging) during periods of volatility, you set the stage for long-term profits. Treat market declines as long-term buying opportunities.