Thread by @KA_charts

Volatility Is Normal—and Volatile
Is “now” a more volatile time? Read the news, watch TV—odds are
someone is saying it is. And that has been true almost every year
forever. (It’s a twist on “this time it’s different” and more evidence
investors have faulty memories.)

But if you took a time machine back
and visited any point 1, 5, 10, 17, 32, 147 years ago, you’d probably
still hear folks saying, “Well, now is just more volatile than before!”

This belief—that stocks are increasingly more volatile now—
doesn’t need a bear market bottom to pop up. Undoubtedly, fears
stocks have become more inherently volatile do increase in the
intensely volatile bear-bottoming periods.

But even in relatively less
volatile years (and yes, volatility is itself variable) you get folks
feeling like stocks are increasingly careening out of control via
volatility.

First, stocks are volatile. Can’t escape it. Volatility can be terrifying,
but the fact the market wiggles wildly shouldn’t be surprising. It is
now volatile, always has been, always will be, forever and ever,
world without end, amen. And you want it to be. More on that in a bit.

If you remember the terrible market environment of 2008 into early 2009. It
seemed the parade of bad news was endless. Banks were going bankrupt, the government response was an unpredictable mess, stock prices were going off a cliff, unemployment was spiking.

For a few months, it did indeed feel like the world might end. Of course,2009 was a terrific recovery year But even 2010 had a big market pullback followed by a full-fledged
correction.

The world discovered Europe’s peripheral economies
were weaker than widely thought—threatening the very existence of
the euro! Then there was the “flash crash” on May 6 (also known as the “Crash of 2:45”) broadly attributed to a string of technical glitches

—when within mere minutes, broad markets plummeted. Stocks were down nearly 10% at one point intra-day, only to quickly reverse most of that midday fall (while still ending the day down). Very scary stuff.

But was that proof the stock market is inherently more volatile now? The market more unstable? Of course not. 2008 was indeed a volatile year, but so was 2009! With a few years’ distance, people don’t remember it that way—they just remember 2008 was horrific
and 2009 up big.

But up or down, it’s all volatility.
Fact is, some years are more volatile than others—always been that way. Some weeks and months are more volatile. But despite ever-present conventional wisdom over the decades that the present is more volatile than the past,

there’s no discernible trend the market is getting more volatile overall—just the same normal variability of volatility there’s always been. Plus, whether a year is more or less volatile than average isn’t automatically indicative of trouble—stocks can rise or fall on above-

and below-average volatility. There’s no
predictive pattern. It’s always been this way, yet people routinely forget. So let’s use some history to correct this memory impairment.

Doing so, we can see:
1) What exactly volatility is. (People don’t always know!)
Volatility is itself pretty darn volatile.
2) No matter how you slice it, stocks aren’t getting more volatile.
3) Given some time, stocks can be less volatile than bonds.

And finally,
4) if you want long-term growth, volatility is good, not
bad.
#volatility
#trading
#investing
#vix

What the Heck Is Volatility?
Lots of folks complained in 2008, 2009,2010,2015 that stocks are more volatile . . . now.
And while certainly volatile, that volatility wasn’t much outside the historical norm for a bear market and then a big bounce-back.

October 1, 2010: “On top of that, the market is more volatile than usual. An Associated Press–CNBC poll taken in August and September found about three in five investors less confident about buying and selling individual stocks because of the volatility".
(data from cnbc)

all of these much-ballyhooed innovations have made markets more efficient, there’s good reason to suspect they also make markets more volatile, less stable and less fair.
I’m not sure what “less fair” means.
But there’s no evidence stocks are inherently more
volatile.

That’s just a variation on “this time it’s different.”
Maybe part of the reason people think “now” is a more volatile time is a simple misunderstanding of what volatility is.
In general, people think of downside volatility as bad and upside volatility as not volatility at all!

It’s just “good.” But volatility isn’t “bad” or “good.” It
just is.
Typically, industry wonks measure stock market volatility using standard deviation. If you remember standard deviation (SD) from your college statistics class, feel free to skip ahead.

Standard deviation is just what it sounds like—a measure of how much something deviates from its expected average. And it can be used to measure historical volatility of single stocks, sectors, the market as a whole, anything for which you have enough data points
#SD
#volatility

A low SD means results didn’t vary much from the average. A higher SD means there was more variability.
A few things to remember: Standard deviation is always backward looking.

It’s a very useful tool, but nothing about SD tells you how volatile or nonvolatile anything will be immediately ahead—it just describes how stocks behaved in the past on average. It’s a decent guide but not a useful forecasting tool(but tools on this being sold as a holygrail)😷

A standard deviation of 0 tells you, historically, returns have never varied. Effectively, that would be like cash stashed in your home
(ignoring inflation’s eroding impact over time). You don’t need historical standard deviation to tell you stocks have been pretty darn volatile.

I bring it up because, again, stock market volatility is itself
volatile. Some years, market volatility is vastly above. Some years, it’s vastly below average. And some years, both happen in the same year. An average is an average and bakes in huge variability around it.