The Little Book of Market Myths: How to Profit by Avoiding the Investing Mistakes Everyone Else Makes

Chapter Four

More Volatile Than Ever

“Stocks are just more volatile now.”

Sound like something you’ve heard? Or read? Or believe to be true?

Investors don’t just tend to focus mostly on shorter-term volatility (Chapter 3). They often fear volatility is increasing! And it may feel true. We had a big bear market in 2008—the biggest since the Great Depression. Soon after, there was a big global correction in 2010 on eurozone-implosion fears. And another big correction in 2011 and a smaller though still scary correction in 2012. Many posit the onset of high-frequency trading and speculators have contributed to increasing levels of stock volatility.

Don’t believe it—it’s a myth.

First, volatility is itself volatile. It’s normal to go through periods of higher and lower volatility. Second, it’s a fallacy to assume higher volatility spells trouble. Third—volatility in recent years (as I write) isn’t all that unusual and is well within normal historical ranges.

Volatility Goes Up, Too

Pop quiz: Which year was more volatile? 2008 or 2009?

Most investors will automatically know US and global stocks fell huge in 2008 and then boomed huge in 2009. But they may wrongly assume stocks were more volatile in 2008.

Not so. As measured by standard deviation (a widely used metric for volatility), 2008’s standard deviation was 20.1% and 2009’s was 21.3%.1 (Measured using US stocks, which I use throughout this chapter for their longer history.) Yes! 2009 was more volatile!

How can it be? To understand ...