Why Is The Stock Market So Volatile At Times?

If you've been follow financial "journalism" at all you will inevitably hear how volatile the market is and how you should take action to protect yourself from the volatility.

However, when we turn off the "news" and look at things rationally, we can see a completely different story. One that is actually true.

It's not the market that is volatile. It's the investors that are volatile.

Why is the Stock Market so volatile at times?

The first and most important thing we must realize is the stock market isn't a market of stocks, it's a market of the greatest companies in the history of the world! Yet their stock prices are much more volatile than the actual values of their companies. Why?

The reason you see such volatility in the stock market at times has very little to do with the value of the companies and almost everything to do with the irrational emotional behavior of the people/investors buying and selling those stocks.

For example, when great companies see bad times coming they act to protect their money so they can enhance their competitive position during any downturn. To the irrational investor, they see this as a reason to panic and sell at any price. We can see that the stock prices are reacting to the way the irrational investor is overreacting.

As goal-focused, long-term investors you and I take a much longer view of things. We see that these surviving companies will emerge even stronger and more profitable than they were before the downturn.

Always remember, the irrational investor always overestimates the market in "good times" and underestimates the market in "bad times."

It isn't the markets that are so volatile. It's people.

The more you become aware of this fact, the less likely you will be to fall into this trap. The more you become aware of the rationality of great companies, you will begin to notice more often the irrationality of the average investor. It isn't the markets that are volatile, it's the people that are volatile. Stated another way: stock prices are much more volatile than the values of the same companies.

Contemplate on that truth and remember it when you see stock prices falling and financial journalism calling it economic Armageddon. Then you will notice how often this happens and maybe then you will realize there is nothing to worry about. That this time is not different.

In the words of the great Warren Buffet, “The stock market is a device for transferring money from the impatient to the patient."

You need a plan

If you're interested in "beating the market" or finding the next "hot stock" we can't help you.

If you're interested in creating a goal-focused, long-term plan to ensure you don't run out of money in retirement we can help you.

We create and manage retirement income and investment plans for electric cooperative retirees to ensure the money you have saved lasts the duration of a 20-30 year retirement and beyond.

We work to ensure the money you need in the early years of retirement is safe and not subject to temporary market fluctuations, while at the same time putting the money you'll need in the later years of retirement in a position to receive the permanent market returns necessary to provide an income that increases and outpaces inflation.

For more articles about retirement planning and investing click here.

Brian Coleman/Electric Cooperative Retirement Specialist

80/20 Financial Services is an Independent Registered Investment Advisor (RIA) registered in the state of Missouri (CRD# 300772). We help electric cooperative employees in Missouri and throughout the United States transition into retirement. Being independent allows us to work exclusively for YOU.

Photo by Yiorgos Ntrahas on Unsplash