Many investors have been trained to fear volatility in the stock market. It makes sense because who likes to endure gut-wrenching swings in the S&P 500?
Now, it seems that volatility is on vacation in the sixth year of the bull market. The CBOE Volatility Index (VIX), known as Wall Street’s fear gauge, is near multiyear lows, which suggests investors may be growing complacent.
However, if volatility does return to the market, it could actually be a good thing for long-term investors because they may have the opportunity to buy stocks at lower prices.
Volatility in individual stocks and in the market can work to an investors advantage, said Dividend and Income Plus portfolio manager Bill DeShurko in a recent Main Street article.
“Without volatility, there would not be the opportunity to acquire stocks at low prices,” DeShurko said. “Market volatility is always the friend of the patient investor. Studies show that when you buy stocks is very important. For an income and value strategy, buying into positions at a low price is imperative.”
Meanwhile, Long Term GARP portfolio manager Yale Bock told Main Street that the reason volatility can be good for an average investor’s portfolio has to do with the premise, which was originated by Ben Graham, the father of value investing, of buying assets at lower prices when other investors sell them at discounted prices versus their underlying ability to generate cash.
“An investor can take advantage of these situations by buying the stocks of companies which have a long track record of growth in cash flow, net income and operating income or when the underlying assets of a company are not being given credit based on stock price,” he said.
Since owning equities can benefit an investor for several generations, when a volatile market occurs, consumers should take a look at their favorite companies and research their stocks, Bock said.
Read the full article at Main Street.
