Last week, the market tripped. This week, as of this writing, it bounced. It is a clumsy Tigger from Winnie the Pooh. First we bump into Rabbit, then knock over Winnie the Pooh’s honey and then we bounce around and find something good to cheer about. What will tomorrow bring?
The truth is that over time, we get paid more in stocks because the bounces scare our neighbors out of the market at just the point they should be hanging in there or, if they have some diligent savings plan, investing more. Don’t get too distraught nor too excited, the bounciness may continue, both up and down. Instead of cheering on the increases, celebrate the bounciness!
Here is a link to a research paper, Volatility Trap: Why Staying the Course Makes Sense, that describes three fundamental truths about the past. We know that past performance is not indicative of the future, right? But history is the only guide we have. And these truths make sense. So give it some thought the next time Kyle Clark on 9News announces a 400 point mid-day drop in the market. Perhaps you ought to say, “good!”
1. As the stock markets decline, volatility increases. In other words, bounciness goes up when our account values go down.
2. After volatility subsides, stock market returns increase. In other words, after the bounciness is over, our account values rise.
3. Therefore, volatility is a predictive indicator. In other words, celebrate the bounciness, good things could be coming your way, Tigger!