Stock Market Volatility - Myth or Truth?

By: Allan Roth

Stock market volatility is wreaking havoc on my emotions. Then again, since it's emotions that are at play here, my perception of the volatility increase may not be all that logical.

So I set out on a long journey to determine if anyone could provide me with monthly stock market returns. After being told "no" many times, Bob Waid, Managing Director of Wilshire Analytics, gave me the data I've been looking for. He examined the monthly stock returns of the Wilshire 5000, which is the total US stock market. I was truly shocked by the results.

Monthly stock returns
Wilshire compared the percentage to the times stocks moved within certain ranges as measured by percentage points changed. It turns out that, in the last ten years, stocks moved by more than 10 percent (either positive or negative) about 3.3 percent of the time. Amazingly, this is down from 4.08 percent for the previous 30 years. Using another measure, standard deviation, stocks had a 4.70 percent monthly standard deviation over the past ten years, up only slightly from the 4.59 percent annual standard deviations from the previous 30 years.

Conclusion: On a monthly basis, stocks are not significantly more volatile over the past ten years.

Annual returns
Wilshire Associates was kind enough to run the numbers on an annual basis, comparing the years 1970-1999 to the past ten years. Looking at the chart could give the message that stocks have also been no more volatile lately. Waid correctly cautions not to take too much from this, as the sample size of ten years is too small.

Also, the magnitude of the changes isn't reflected in this chart. In fact, Wilshire calculated the annual standard deviation of the US stock market had increased to 22.0 percent in the past ten years from 17.1 percent in the previous 30 years. That's a pretty significant increase though, again, it's based on only ten years.

Conclusion: On an annual basis, stocks have been more volatile over the past 10 years.
My conclusion
Though the stock market does appear to be slightly more volatile now, it's not by nearly as much as I thought. Three possible reasons that may be driving us to think stocks are now more volatile are:

The index numbers are much bigger over the past ten years. In 1970, an 8 point change in the Dow equated to a one percent change. Today, it would take about 105 points.
Average stock returns over the past ten years have been far lower than the previous 30. We notice the pain more than the pleasure.
Money means more to us today than it did in the past. We have fewer working years to earn income.

I suspect market volatility is here to stay. There are great ways to play market volatility by being greedy when others are fearful and fearful when others are greedy. I simply call it rebalancing.

Author's note: It seems likely that daily volatility has increased though I did not look at this data.

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Allan Roth
Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month. His goal is to never be confused with Mad Money's Jim Cramer.
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