“Volatility” is a measure of price-stability. The CBOE’s Volatility Index (“VIX”) serves as a yardstick for volatility of the U.S. equity market in which high values indicate unstable, gyrating stock prices. The chart shows this year’s changes in the S&P 500 Index for large-cap stocks and the Russell 2000 Index for small-cap stocks relative to the VIX. Compared to the first day this year, both stock market indices increased when the VIX was below 20 and decreased when the VIX was above 30. The bond market moved the opposite way. The current volatility is above 30 on the VIX scale due to the following influences on investor sentiment:
- slowing growth of the U.S. Economy
- general mistrust of the economic policies of the U.S. Government
- potential defaults on the soverign debts of Greece, Portugal, Spain, Ireland, and Italy
- high-frequency trading in large volumes
In my opinion, today’s financial markets will remain volatile and there could be further decline in stock prices before the economy improves. I don’t know how far the markets will decline or how long the volatility will persist.
What are the retail investor’s choices?
- Speculate in a variety of ways such as day-trading and use of leverage (‘leverage’ means borrowing capital to buy assets). These are risky actions.
- Do nothing except continue to hold all investments and reinvest the returns. Expect the stock market to return 8% over a few decades.
- Seek ‘safe havens’ of low-risk investments (CDs, money markets, investment-grade bonds, etc.). Investors seek safe havens for reasons that span from panic to planned rebalancing.
- Seek bargains in the down-market. Active investors have choices of penny stocks (below $5/share), favorite securities, and securities with high intrinsic value. United Technologies is one of the companies in my previously posted company profiles that has high intrinsic value.
Do you have comments about Volatility?
Copyright © 2011 Douglas R Knight