Is Volatility Normal?

The short answer: yes.

But let’s add some perspective.

You may read a lot about volatility – or how much the market goes up and down – being the “new normal”. Another short answer: untrue. Volatility has been an integral part of the investing experience since the very beginning. As a perceived risk, it’s one of the reasons stocks have produced, and are expected to produce, higher returns than less volatile assets like bonds and cash. Risk equals reward, so they say.

A client recently mentioned how the market seems to go up and down much more than in the past. We asked, “In what way?”.  She replied, “It (the Dow) seems to move a hundred points all the time.”

True. It does, on average. What she referenced is simply due to math. Twenty years ago, the Dow traded at about 6,000. Today, it is north of 18,000. The average daily movement of the Dow since 1928 has been about 0.75%, in either direction. In 1996, that was 45 points. Today, that’s 135 points – seemingly more volatile, but no different mathematically.

As a practical matter, you should ignore volatility in the short term. Any money you need to spend any time soon shouldn’t be exposed too much, if any, volatility. But for long term money, embrace it. It’s part of what makes your portfolio grow.