High Volatility Should Not Bother Long-Term Investors

 |  Includes: DIA, QQQ, SPY
by: Eddy Elfenbein

One year ago was the Flash Crash. Between 2:42 pm and 2:47 pm on May 6, 2010, the Dow lost 600 points.

The WSJ’s Evan Newmark said: “Today’s market was neither orderly nor efficient nor trustworthy. It was just a bunch of computers making ugly, messy love with each other. And your money hung in the balance.” (Here’s CNBC in fast motion.)

The next day, Felix Salmon told you it was time to sell your stocks.

Since the close of trading on May 7, 2010, the S&P 500 is up 21.28%.


I don’t mean to tweak Felix. Seriously, I don’t. He’s not a stock-picker and I am so I can assure you I’ve made countless more bad calls than he has (Netflix anyone?).

I do want to show you that plenty of smart people can be wrong about the market’s direction. In fact, if you want to look at it closely, Felix was correct about the market for the first two months.

Plus, Felix offered wise cautions about investing in stocks. I’d add that I’m precisely the kind of greedy speculator that Felix granted an exception to. My qualm is that Felix said that we were entering a period of massive volatility. As it turns out, we weren’t. When Felix recorded that, the $VIX was around 40. Last week, it got as low as 14.27.

Even if we were entering a period of high volatility, that shouldn’t dissuade people who are long-term stock investors (assuming they’re aware of the risks in owning equities to begin with).

My point is that there’s nothing inherently bearish about high volatility. For the most part, volatility doesn’t seem to play a large role in equity returns. When the $VIX is at very low levels — below 13 — the market has performed a little bit better, but that’s at the extreme.

Volatility simply means that stocks will bounce around a lot from day to day. The best cure for high volatility is patience.