Nov 5 2015

Ride out volatility

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When moving from Chicago to London about a year ago, I was offered some “settling in” tips as part of a relocation package.

Some were more mundane than others. For example, the classic “football” doesn’t mean “NFL” (although a walk down Regent Street this autumn might indicate otherwise) and ”pants” does not refer to the bottom half of a suit.

But the section that caused my London-based colleagues the most mirth dealt with that most British of conventions: queuing. Top tips from the handbook included the advice that Britons always queue, so this practice must be learned. Order will be maintained by fellow queuers and any authorities present, so follow their lead and be patient. It is typically not the done thing to converse with others in the queue, or comment on the length of the queue, to others waiting with you. And, most importantly, show no emotion in the queue either over the time or length of the queue.

Evidently, the handbook’s author thought Americans had never seen a line before. But in actual fact, the tips were a nice reminder that keeping calm when things get out of line is advisable – and worth it. This is certainly the case when it comes to global stock markets. Things got very out of order earlier this year, but for those who maintained their composure, avoiding emotional decisions in the midst of the chaos has already paid off.

Volatility is unavoidable in investing. There are many measures of market volatility, including the standard deviation of returns, the S&P 500’s VIX index and implied options. For long-term investors, the most meaningful measure may be the largest intra-year decline (or maximum drawdown) as it represents an investor’s largest loss during a given year. This week’s chart shows this measure for the S&P 500 relative to each year’s annual total return. These drawdowns can occur over days, weeks or months.