By Scott Kyle, Chief Investment Officer at Coastwise Capital Group
Stock prices go up, stock prices go down. Lately it seems like daily 100-point swings in the Dow are the norm. Traders call it volatility, and the average investor is scared to death of it. But should they be? Is
truly something to be feared? Or should it instead be embraced, taken advantage of -- or at worst ignored?
One of the benefits of owning publicly traded securities (stocks) is that of price transparency. Translation: you know at any point during market hours what your stocks are worth. Imagine if this sort of continuous pricing applied to your home. Picture a ticker next to your front door that announced to you, minute-by-minute, hour-by-hour, what your home was worth. Your neighbor gets a roof leak and wham: the price of your home plummets by $10,000. It would be enough to drive anyone crazy.
Yet otherwise rational people seemingly can’t help but get sucked into watching the price of their stock holdings fluctuate (often wildly) day to day. Worse yet, these investors who state their time horizon for holding stocks is 5 years, 10 years or more, will sell a good company for no other reason than the price is down – and the fact that they can (as in, it is easy to sell a stock. Try selling your home with the click of a mouse).
Thus ironically, some of the benefits of stocks – the fact that they are regularly priced and that they are liquid (can be easily sold) prompt people to take actions that are not in their financial interest. Rather than being fixated on daily headlines and stock price movements, investors should focus on the fundamentals of the businesses they own – or hire someone to pay attention to what really matters over time. If stock prices move dramatically, investors with the time and skill should avoid the example set by most retail investors and take advantage of these fluctuations by selling high and buying low.
Simply put, volatility is neither good nor bad: it is just short-term white noise. Most long-term investors should simply ignore it, and only the few nimble traders who can enhance returns through intelligent trading should attempt to reap any benefit. When markets hop around like a fish out of water, many investors react like this is the first time in history stocks have exhibited such volatility. That couldn’t be further from the truth. Stocks have been and will always be volatile, not because they are unique when it comes to financial assets, but because they are priced regularly. Don’t let this fact cause you to make inferior investment decisions. Turn off the TV, shut down your computer and go enjoy your summer…and if you want to learn more about smart investment strategies, simply contact us at
today. Visit us online, at
The information in this article is strictly for educational and illustrative purposes and is not an attempt to furnish personalized investment advice or services.