Is volatility a necessary evil? Can we avoid it? Should we?
Every moment of every day the stock market is open, prices fluctuate. And nowadays, since there is after-hours trading, prices fluctuate all the time.
So What?
It becomes advantageous to understand how varied the prices of any particular stock is compared to overall indexes. This allows for an investor to understand one aspect of the risk they are taking when investing.
Since investing in anything involves risk, it is helpful to know how risky something is, at least in relation to the overall market.
Bad or Good; Not Bad or Not Good
Is volatility good or bad? There is no answer to that question, because volatility is a state of being. For some investors volatility is a good thing because there is the opportunity for increased return. For some investors, it is not good because it shows a stock is performing in a wider range than expected.
So it comes down to expectations. Which are personal and based on one’s opinion.
How
Volatility is measurable in more than one way. One of the ways is via the mathematical concept of standard deviation. Another way is through the calculation of beta.
Standard Deviation
While the calculation of standard deviation is beyond the scope of this post. But we can say that with a range of data (for example, stock prices), one standard deviation will encompass about 68% of the data. The second standard deviation will encompass about 95% of the data. Thus we see that using the first standard deviation, since we expect most prices to fall within 68% of the range, prices that fall outside of that range is considered to indicate that the individual security is of a higher volatility.
Beta
Beta measures the movement of a stock’s prices compared to an overall index. So for example, if a stock’s price moves 110% for each 100% move of the S&P 500, we can say the stock has a beta of 1.10. A stock with a beta of 0.9 moves 90% for each 100% of the S&P 500.
For investors seeking gains for selling, a higher volatility rating can be advantageous. If you knew that on average a stock’s price moved greater than the overall market, your could expect that sooner or later it will advance and you could potentially sell at a higher price. On the other hand, the price could equally fall more dramatically than the overall market.
For dividend investors, volatility is a mixed blessing. We do hope for price movement. However, if a stock is less volatile than the market overall, then we can expect generally stability while collecting our dividends.
My Findings
I took a look at my holdings. I found that the beta values of the stocks I own range from 0.16 to 1.96. The average beta value of all of the stocks in my portfolio is 0.88. So my portfolio is somewhat less volatile than the market overall. That seems to make sense to me. However, looking over the beta value for each holding came up with some surprises. Some stocks which I had considered to be slow movers turned out to have higher than expected beta values; others which I expected to be effervescent turned out to have lower than expected beta values. This indicates I have more opportunities to be aware of my portfolio.
Where To Find It
Various websites with financial data publish statistics that include some volatility information. For example, Yahoo.com‘s listing of a stock data include beta. Navigate to yahoo.com, enter a stock symbol. On that stock’s Summary page, you will find the Beta value.
Who Creates or Dampens Volatility?
We think that “the market” determines the prices of a stock, and thus volatility is a function of price movement. This is correct, however, it also comes down to investor sentiment. Prices move based on people’s ideas about what they think will happen. And what people think is a function, at least partially, of what information, or news, or rumors, they have about a company. Therefore, the information people have may move them to act. Thus, how information is disseminated from or about a company has a large part in influencing investor behavior. Not all news and information and rumors are benign. Not all influencers have one’s best interests at heart. It behooves us to remember who creates volatility.
Do you consider volatility when buying stock? Let me know here.
The Carte Behaim is a map upon which the oldest existing terrestrial globe is based, which was produced by Martin Behaim from 1490–1492. The globe, known as Erdapfel is the oldest surviving terrestrial globe. The Americas are not included, as Columbus returned to Spain no sooner than March 1493. The name Erdapfel is not related to the modern meaning of Erdapfel in southern Germany and Austria, which is “potato,” as potatoes had not yet been brought from America to Europe.
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