stock market volatility chart
Many investors are convinced the market is stacked against them.
It is.... but not for the reasons you might think.
Dismal returns actually have very little to do with super computers, research, insider information or access to the trading floor.
The real issue comes down to something very simple - the difference between how individuals and professionals approach stock market volatility.
Most investors head for the hills when volatility rises.
Successful traders, on the other hand, embrace it because they know stock market volatility represents an opportunity.
I find this especially ironic considering how often I hear individuals tell me they invest because they want the "big gains."
Because most of the time they choke at the very moment when the upside potential is highest. Instead of buying when prices are low, they head for the exits.
This costs them big time.
The Perils of Stock Market VolatilityA 2011 study from DALBAR, a Boston-based research firm, shows that investors achieved a mere 41.9% of the S&P 500's performance over the 20 years ended December 31, 2010.
In other words, investors left 58.1% on the table.
The DALBAR study also shows that the average investor achieved only 3.8% a year versus the 9.1% annualized returns of the S&P 500 because they tended to jump in and out of the markets at the worst possible moments.
Adding insult to financial injury, Berkeley Finance Professor Terrance Odean's analysis of more than 10,000 retail brokerage accounts shows that the stocks investors sell tend to outperform the ones they buy.
In fact, Odean found that winning stocks went on to gain an average of 3.4 percentage points more in the year after they were sold than the losers to which investors clung.
The pros have a very different view.
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The New Abnormal: Permanently Engineered Market Volatility
If the gut-wrenching market volatility of the past few weeks has made you sick to your stomach , I have some bad news for you: violent volatility is the new normal - or more precisely, the new ab-normal.
After massive market moves last week, the Dow Jones Industrial Average tumbled 419.63 points yesterday (Thursday). And, while t hat may be bad news for average investors, it's something Wall Street wants.
If you're not a day-trader, high-frequency trader, hedge-fund manager, or institutional desk trader, reading this is going to make you mad as hell. But it's something you have to know, understand, and accept if you're going to be a successful investor going forward.
The reality is that in their crusade to manufacture extraordinary personal wealth, Wall Street insiders have engineered volatility into the capital markets.
This change is permanent.
Indeed, the same dangerous volatility that destabilizes markets creates innumerable trading opportunities for Wall Street's proprietary traders. These traders feed off each other and off their banking-industry clients.
The game is simple: Wall Street creates market volatility, some of which leads to panic. Panicked investors, in desperate searches for safety, turn to "experts" for protection. And Wall Street rakes in the profits - not just from their market-crushing trades, but from the investment fees they charge individual investors, companies and nations.
It's similar to how the mafia might trash your business and then offer to "sell" you their protection services.
By increasing volatility in stock, bond, commodity and real estate markets, The Street has created a self-perpetuating moneymaking machine.
Obviously, without the manufactured volatility, markets would be more stable, predictable and better serve economic development and growth. But there are no extraordinary gains to be made in calm and stable markets.
So Wall Street for decades has worked to make market volatility the norm.
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