What is volatility?? People use it all the time when referring to the stock market but simply put, it is the price fluctuation of stocks up and down. I titled my blog "Riding the Rollercoaster" because over history the price of stocks looks somewhat like a rollercoaster as it goes up and down and up and down. I've gotten a ton of emails over the past week from clients and friends that I know who are concerned about how their investment accounts went down last month (may). I hate to be the bearer of bad news but I guarantee that if you have money invested in the stock market, you will absolutely see your account go down in value from time to time. I love what I do, and I work hard to do it well, but the unfortunate part of this is that stock markets are always in movement up and down. Imagine a wave at the beach, constantly in motion and constantly going up and down; this is exactly what stocks do. Depending on when you catch them (buy), depends on the direction you will see them go.
Last week was the best week for stocks in 2012...however the previous month of May was the worst month for stocks since November of last year (hence why so many people were concerned when they received their May statements). That is EXACTLY what I'm talking about. Depending on when you look at your online account or statement, you will see an increase in value or a decrease; last month of course most people saw a decrease (unless they were sitting in cash or moved in and out of the markets which I beat a dead horse about doing). I have always been a huge believer in that an investor does not always need to stay invested in stocks, but that it is more prudent to be opportunistic and move in and out of the market when possible. Last night the LA Kings won the Stanley Cup (hockey to those who don't watch sports). Why did they win? They took more shots on goal than the other team; they were more opportunistic and tried to take advantage of every situation they had to put the puck in the goal. Wayne Gretzky, arguably the greatest hockey player of all time (who also played for the LA Kings), was famously quoted as saying he always skated to where the hockey puck was going to be and not where it was. By skating to where it was GOING TO BE, he was able to beat his competition and be ahead of everyone else - he anticipated what was going to happen. How in the world does this have anything to do with whether or not I saw a decrease in my account last month? When it comes to investing, you have to think not only what is currently happening but what COULD happen going forward. I try all the time to explain why things are happening, why stocks are going up or down, and what I expect for stocks going forward based on what I know or have read. I've written until I'm sick about the financial mess in Europe and how we are no where close to seeing an end to that. We have been held at the mercy of Greece, and now it appears that Spain is the next culprit (hence why the markets were down so big yesterday). This is a problem we will be dealing with for some time to come, but the question then becomes how do we invest in a manner where we don't see our accounts decrease in value over and over again, month after month? Skate to where the puck is going to be. How do you make money in the stock market? BUY LOW SELL HIGH. Even though we are still in the midst of the financial crisis in Europe, stocks will not go down every single month. That's just something they don't do. At some point, the price of stock investments will be attractive enough that people will come in and start buying (like last week). When things get ugly and the markets sell off, most people (and several that I've gotten emails from) want to sell out of their investments and move all their money to the sidelines...I would not suggest doing so. I would however take the time to look at your current portfolio allocation to see WHY your account went down. Were you over invested? Did you own mutual funds that had holdings that were connected and ultimately affected by what's going on in Europe? Take time not to run for the hills and sell everything when it's down, but look at what's going on specifically with the money you are saving and investing. Remember the biggest part of investing money in the market is the emotion that comes with it. In addressing the markets, I am ALWAYS honest in analyzing if it's a good time to be invested or not. I ALWAYS try to skate to where the puck is going to be and take as many shots as possible, but also knowing that I am going to miss a lot of shots. If you're investing money in stocks/mutual funds, you WILL take shots and miss. You WILL buy a stock or a mutual fund and see it go down in value at some point. I do know however that over time, if you invest in the right stocks or funds, you will see your account increase in value - history shows us that. Of course by saying that you have to address one of the three main issues facing individuals who invest money...time frame.
I'm going to write about the three most important investment principles here shortly but in the meantime, try to be a Wayne Gretzy and focus on where the puck (stock/fund investments) will be, not where they've been.
