macroeconomic volatility and stock market volatility

Stock Market Volatility: How to Beat the Market at its Own Game

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 Volatility

A 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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