The past six months have seen markets around the world surge and fall on a daily basis. In Japan, the Nikkei last October plunged an unprecedented 10 percent in one session. That same month saw the Dow losing 7 percent, the Nasdaq down 9 percent and the S&P 500 falling 8 percent all in a single session.
Now, it's pretty much the norm for U.S. markets to move in a plus/minus 3 percent range in one session. And investors are asking, when will it all end? If the banks stabilize will volatility then move back to normal levels? If the economy shows signs of recovery will the drastic fluctuations we see finally cease?
The truth is, volatility is likely here to stay. Considering the dramatic changes happening with
industries and economies throughout the world, emotion will continue to dramatically affect markets as investors are overwhelmed by fear and cling to the hope for better times ahead.
It's time to stop hoping that volatility will go away and instead start investing as if it's a permanent part of the investment landscape. Understanding that fluctuations can occur primarily on sentiment (and not based on facts) should make investors pause and determine if the upside is worth the possible downdraft if raw emotion kicks in at the wrong time.
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Investing on the assumption you might be wrong will helps you assess if the worst case scenario can be tolerated. You won’t always be right. Know what the bad news looks like and how much it will impact you.
And understand this -- sound investment decisions, while often rooted in fundamentals and facts, can be derailed by panic and high emotion market forces. One only needs to look at bank stocks as an indication of the type of fear that can grip the investing community’s psyche.
Think back to the year 2000 when internet stocks were impacted with a similarly strong emotion (incredible euphoria). Wide swings in sentiment affect markets on the short-term. And while on the long-term facts rule the day, not all investors choose to wait for their investment decisions to yield results. Not all investors have the courage to hold through surging sentiments and they pay a heavy price for their reactions.
Volatility is neither good or bad. It just is. Denying its existence and its roots in human emotion is at best imprudent. At worst it can be dangerous and highly destructive. And in today's rapidly changing environment, being aware of dangers and disasters (as well as opportunities tainted with a euphoric perspective) is crucial.
It's a highly emotional sentiment driven investment world we live in today. Embrace this reality and adjust.