Thus far in 2017 we have experienced a stock market without much volatility. For people who tend to watch the stock market more closely they will tend to wonder, if this relative calm will continue.
When surveys are done measuring investor confidence, it is normally the case that after a stock market has done well people feel more strongly about adding money to the market. Likewise when stocks have been performing poorly there is a tendency of individuals wanting to sell.
While there are not normally surveys on market volatility, there is a tendency for people to expect the present environment to continue. This causes people not to properly consider the risks involved in investing.
One thing that can be difficult to decipher is what various point moves in the market averages mean. Oftentimes on the news there will be a reference to what the Dow Jones Industrial Average, which is an index of 30 stocks, did for the day. On any given day its movement would typically be 200 points in either direction.
For some people not overly familiar with the index hearing a move of 100 points might sound like a lot. However, it is the percentage change that really matters, which is normally not stated.
The DOW index is currently around 20,000, so a move of 100 points is only .5%. When the index was less than 10,000, a 100-point move was more significant because that was a move of over 1%.
People do realize that markets constantly move, but many do not realize what constitutes a large move versus something that is insignificant. That is why it is important for people to think in terms of percentage moves, rather than how many points a particular index moves.
Looking at things on a percentage basis is certainly applicable when examining monthly account statements. Obviously people are concerned about changes in dollar terms, but the measure of volatility is the actual percentage change.
A younger person may have a balance of $10,000 in a retirement account, and if the dollar change for a given month was $500 that would be fairly significant, since that is a 5% change. For someone who has an account balance of $100,000 a $500 change in a month should not be concerning, since that is only a half of one percent.
Typically markets are volatile when moves of 2% or more are seen in a day. Moves of 1% in a day would imply moderate volatility. This year as of Feb. 17, virtually all the daily moves in the market have been less than 1%.
Over the course of a month larger moves should be expected. A move of a few percentage points in either direction would be common for a month. Moves of over 5% in a month imply moderate volatility, while a 10% move for a month is very volatile.
For a given year the stock market finishes in positive territory about 75 to 80% of the time. However, the range of moves can be quite large with a typical range being between -10% to plus 25%. There have been years on occasion of moves even greater than that range.
Right now the stock market has been performing well with little volatility. That could certainly continue for a period of time. However, investors need to be aware that calm markets don’t last indefinitely. As always, people should have a long-term perspective when investing in the stock market because volatile periods can occur unexpectedly.