Financial markets have been very volatile over the last few years. By some statistical measures, the volatility is not so extreme compared to historical levels, but there have been certain short periods of time, like the month of August just passed, that contain movements both up and down that are very extreme. For example, during the week of Aug. 8, the first four trading days of the week for stocks resulted in alternating down and up moves in excess of 4 percent each day.
The fear of losing money strikes hard into the psyche, and studies have shown the brain waves when people think of losing money to be similar to those experienced when confronted with the potential for great physical harm – such as when coming across a bear on a hiking trail.
I admit to feeling those same, very human, emotional tugs, but it is important to separate possibility from probability when managing our investments. Yes, the financial system could possibly fail, but a long history of surviving tough times shows it's not probable.
It is important to keep the periodic bouts of fear and volatility that strike the markets now and then in perspective and not assume that each new one means the destruction of our financial lives. I find it interesting that the approximate 17 percent stock market correction in the last few weeks drew a significantly larger fear-factor reaction than the correction of about the same size in May and June of 2010. I attribute the extra stress this time around to the very negative news environment we've all been bombarded with since the Japanese earthquake and tsunami in March and news about fiscal troubles in Europe dating back to before that. Of course, there was our own well documented issue with raising the debt ceiling about a month ago. That proceeding certainly didn't increase anyone's confidence.
In my column on Aug. 24, I highlighted the Volatility Index, which is a method of measuring fear or complacency by stock investors. Without re-hashing those details, I'll just remind you that when the measures of volatility reach extremes, it usually indicates the worst of a stock market correction may be past, and with patience,it is usually a good time to invest or at least stay in your plan. While we may see some continued volatility over the coming weeks, which would be normal following a quick, sharp correction in prices which we just experienced, there is one other indication that the next year or so may be better for investors.
Corporate insiders are executives and directors of corporations and they have to report their buying and selling activity of their own company's stock within a short period after placing trades. The second week of August set an all-time record for insider purchases relative to sales since this data has been kept. There are many reasons for these executives and directors to sell stock (such as diversifying, buying a new home, paying for a daughter's wedding, etc.), but there is only one reason to make a purchase of additional shares. Obviously, if these individuals thought their company would be entering a tough period for business, they would most likely wait to buy additional shares. The opposite occurred, and past experience tells us this bodes well for potentially higher stock prices in the coming year.
Expecting volatility and uncertainty, and managing through it, rather than running every time it rears its head, would seem to be the best course of action. Of course, always use an appropriate investment allocation across investment types for your personal situation to control short-term volatility and the pressures it creates to act out of fear or greed.
Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing. Visit www.breitercapital.com.