It's a new year and everyone is making stock market predictions. This year our prediction is: the markets will fluctuate. (Thanks to J.P. Morgan for that insight, which is still a savvy prediction, even more than 100 years later.)
With fluctuations come volatility. A couple times each year, the stock market reminds us that it doesn't just give away free money. We saw an example of this in November, when stock market returns started strong, but turned negative in a hurry. For a few weeks, the market jumped and fell dramatically. The volatility index told us to expect average daily moves of 2%. Headlines appeared foretelling a market crash. All this volatility is just a reminder that the stock market is a risky place, right?
As we’ve said many times, we don’t see things that way. Volatility is not risk. Stock prices go up and down just as Chicago's weather can deliver both extreme heat and cold. (Sometimes on the same day!) Movements up and down are a fact of life that we can tolerate. True risk is something we treat differently and with great care. We view risk as the possibility that an investment's value may be permanently impaired. Permanent impairment is what you see at companies like AIG and GE. These companies were playing with fire before the global financial crisis, and 13 years later, their stock prices still haven't recovered.
Volatility, on the other hand, is temporary and it is intrinsically part of the market. It can even be an opportunity to buy or sell as prices can swing for no good reason. We welcome a bit of volatility every now and again, just as we welcome the rain and the sun in their turns. The stock market will likely have some bumpy patches this year, but we invite you to embrace it – like we will – as part of the journey.