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Beware: S&P volatility is here to stay
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The swings in the S&P 500 are back to within normal ranges. We now see big moves in the 1.3% range as opposed to the 3.8% gyrations we experienced earlier in the year. However, this is not the time to let your guard down and return to an "investing as usual" mentality. In fact, I will argue that the markets will continue to become more and more volatile over time. The asset allocation for your serious money, like your retirement funds, must be permanently weighted on the conservative side.
We all have a tendency to repeat the mistakes of the past. But to do so going forward can have devastating financial effects. I base my hypothesis on an analysis of the historical volatility of the S&P 500 stock index. There are many ways to measure volatility. One of simplest methods is to track the standard deviation of the S&P over the last 60 days. This will reveal how much the market moves over its average. The higher the number, the higher the volatility. But it means more than that really. It also measure the "uncertainty" or the probability of your investment portfolio of doing what is suppose to do. In periods of low volatility, we can expect to achieve average returns or slightly better. When volatility is high, we can't reasonably predict any outcome.
Looking at the long-term historical volatility of the stock market shows that volatility has been increasing over time. Even over the short period from 2004-2009. And it didn't just increase--it went berserk. The common pattern is to experience years of average volatility and then unexpectedly experience big swings. And those movements become more and more violent. There is no reason to assume that that pattern will change.
A prudent move would be to consult with a Financial Advisor who thinks about managing risk first and return later. Reposition yourself now for the future and do not be lulled into a false sense of security by the current period of low volatility.
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