…It’s very difficult to predict when volatility will rear its ugly head, but it will happen at some point in the future. Investors need to understand that volatility is a natural outcome in the markets, and that it is cyclical and doesn’t always lead to the outcome most would assume.

Written by Ben Carlson (awealthofcommonsense.com)

…Volatility and performance in stocks can be very cyclical over time….You can see from the following table that there have been very distinct volatility regimes over time in the stock market:

The above shows that poor performance and high volatility tend to be followed by great performance and low volatility. These things don’t run on a set schedule…[so] the cycle of fear and greed can play tricks on investors over time.

  • When markets become too calm, investors can become complacent. This can lead to overreactions and increased volatility down the line.
  • When markets become too volatile, it can put investors on edge far too often. This swings the pendulum in the other direction and can lead to decreased volatility.
  • Highly volatile, low-returning markets end in fear, which leads to higher-returning markets with much lower volatility, followed by the eventual greed that starts the cycle again.

    • These are much longer-term cycles, but it also makes sense for investors to understand how volatility can affect results in counterintuitive ways over the shorter-term. For instance, higher volatility does not always coincide with lower returns or losses over any given year.

  • One of the most volatile years on record was 1933, at 48.79 percent, but even so, stocks were up almost 50 percent that year.
  • An outlier year for volatility was 2009, but the S&P 500 finished up almost 26 percent.
  • The same thing happened in 1998, when volatility was up more than 20 percent, but stocks gained more than 28 percent.

    • On the other hand,

  • Volatility was half of the long-term average in 1977, as stocks fell 7 percent.
  • Volatility was also far below average in 1953 and 1973, but stocks fell 1 percent and 14 percent, respectively, in those years.
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