Stock Market Volatility & Investor Expectations

Jun 05 2008

Stock Market Volatility & Investor Expectations

Published by Roland Manarin at 3:17 pm under Investing, Ownership

When asked to state the average return of the stock market, what is your answer?

10 to 12 percent?

It’s true that this falls in the range of historical, long-term average market returns but to me, average is anything but average.

Let’s say you and are taking a three day vacation and I tell you the average temperature is going to be 70 degrees. What would you pack to wear? Based on the information you know, a cotton shirt and a pair of light weight fabric pants would keep you quite comfortable.

On this trip we start off in Omaha, NE where it is 85 degrees. Then we head south near the equator where it is 105 degrees. After that it’s off to the southern tip of Argentina where it is 20 degrees.

The average temperature of these three locations is 70 degrees but how would this temperature “volatility” make you feel? My guess is pretty uncomfortable since the actual temperatures were not in line with your expectations.

The same holds true with stock market volatility and investor expectations. Non-savvy investors look at the historical market returns and expect to earn 10 to 12 percent most years. Savvy investors look at the same historical data but understand that “average” does not mean “likely.”

KEY LESSON: Short term, the stock market is going to be volatile and the returns investors earn will vary considerably. This will cause market timers and day traders to attempt to make speculative bets and most will lose. It will also cause the mainstream investor to get greedy or fearful then wind up chasing performance and perceived safety thus ending up with sub par performance.

But the most successful investors will be those who remain broadly diversified across mutual funds of common stock and maintain a long-term time horizon. To them, market volatility is a non-issue and most will view market declines as a buying opportunity.

In the short-term, those investments will bounce around like a handful of yo-yo’s. But long-term, those yo-yo’s are bouncing up a flight of stairs.

SO HERE’S YOUR REALITY: Where does your focus lie? On the yo-yo’s or the flight of stairs. Your answer will tell me a lot about your long-term financial success.

When dealing with the investment markets, there are no guarantees and any investment comes with some level of risk. The key is to manage that risk and minimize is so that the odds of building and maintaining your wealth are on your side.

There’s your financial goal. Mine too!