Volatility Is Our Friend


The last few months in the markets have been interesting to say the least. We’ve experienced robust growth with little volatility over the last few years and guess what? We liked it! Strong positive returns with very little downside – what is there not to like?

However volatility is now coming back to normal levels. Unfortunately higher volatility is the price to pay for long-term returns that can outpace inflation. Fortunately, these create excellent opportunities to purchase excellent quality investments at a discount. Remember volatility is not risk. Risk is the possibility of losing capital, volatility is the day-to-day swings that the market experiences.

Here are some facts regarding average downturns in the S&P500 since 1928:

% Drop Frequency of Occurrence
5 % 3 times a year
10 % Once every 11 months
20 % Once every 4 years
30 % Once every decade
50 % 3 times a century

As you can see from the table above, the recent downturn is very normal and contrary to what people might say, it is impossible to accurately time. Volatility is the friend of the investor who knows the value of a business and the enemy of the investor who doesn’t.
There have been 16 market declines in the S&P/TSX of over 5% since 2006 only 2 of those resulted in bear markets. Surprisingly every decline was a result of a different scenario, ranging from inflation fears to U.S. government shutdowns.

The recent selling activity is a reflection of panic to news on China’s economy and markets, but not a reflection of changes in U.S. fundamentals (strong housing markets, low interest rates, historically low unemployment).

Fear in markets is a reality. Understanding how our long-term goals will be relatively unaffected by these short-term movements will go a long way to helping us achieve our goals.

This article was prepared solely by Nader Hamid who is a registered representative of HollisWealth® (a division of Industrial Alliance Securities Inc., a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada). The views and opinions, including any recommendations, expressed in this article are those of Nader Hamid alone and not those of HollisWealth®. Total Wealth Management Group is a personal trade name of Nader Hamid.