Avoid emotional investing amid volatility
Share market volatility has spiked over the last year. Investors should look for the opportunities it provides and stick to a long-term strategy.
Add BT as a preferred source
AFTER a period of relative calm over 2012-14, share market volatility has spiked over the last year as various worries about the global growth outlook intensified. With this renewed volatility, a focus on risk in investing and a desire for safety has naturally come. But what is volatility? What drives it? Why does it come in cycles? Where are we now? And is it the same thing as risk?
Volatility in investing refers to the degree to which an asset's value fluctuates. The most common way to measure it is with a statistical concept called standard deviation which shows how tightly clustered past changes in the value of an asset or returns have been around their average in a certain period.
The higher the standard deviation the greater the volatility. The standard deviation of monthly returns based on very long-term data for major asset classes is around 0.5 per cent for Australian cash, 3.5 per cent for Australian government bonds, 12 per cent for Australian real estate investment trusts, 16.5 per cent for Australian shares and 15.5 per cent for global shares. The top chart shows the standard deviation of monthly returns for Australian and US shares since 1990. As can be seen it has recently picked up.
Share with us your feedback on BT's products and services
