We’ve written about volatility in the markets before.
Sometimes an increase in volatility is news, sometimes it’s simply noise.
In the moment, it’s is nearly impossible to tell the difference. If you are an active trader, the volatility itself MIGHT be news. But for many, the real lesson is volatility may just be noise, for your situation.
At the firm, we condition our clients to expect volatility in their investments. But there are periods of time where we simply don’t see stock prices moving very much. 2017 was a perfect example. Everything moved in one direction (up) all year long. We had “no volatility” in stock prices.
There are times where we see extreme price movement in stocks, and the volume of inbound phone calls to our office picks up.
But then there is May 6, 2010, the day we now refer to as the “flash crash.” It’s also the day I met “John.”
John had made an appointment a few days earlier. He was referred to our firm by one of his friends. John was anxious to meet and find out how we managed investments. When he entered my office, he spied the dual computer monitors sitting behind me, filled with lots of flashing red and green. Around 2pm, John sat down and asked me, “How’s the market doing today?”
“We’re down about 75 points on the Dow Jones, right now.”
The meeting began. There were lots of questions and discussion as we got to know each other. Around 2:30, John began digging through his briefcase for some statements he wanted me to look at. I took a moment to look at the screen. The Dow was now down over 400 points.
John asked “Is everything OK? You look worried about something.”
“The market is really moving. We are down 400 points.”
This was a large move for the Dow Jones. The day began with the Down Jones trading around 10,800. Especially inside one day.
Amazingly, the conversation continued regarding his plans for retirement. But I have to admit, I was dying to turn around and look at that screen to see what was happening.
Just a few minutes later there was another moment while John looked for more papers. I spun around to check the market. I wish I didn’t. The Dow was now down more than 900 points, a drop of more than eight percent. That couldn’t be right.
Over 900 points in one day.
Actually, more than 900 points in one hour.
What could be going on?
I’m not sure how I kept a straight face at that point in the meeting. And I’m glad he didn’t ask me again about the market at that moment.
When the meeting was wrapping up, John was getting ready to go, while pulling on his jacket; he casually asked “is the market still way down?”
More confused than ever, I replied “the market is now down about 250 points.”
“Well, that sounds a lot better!”
What in the world happened during that past hour? Was that a mirage? I know I saw the Dow down 900 points, but here it was – mostly recovered – only about an hour later. I spent time looking for news, but could not find any explanation.
In the following days and weeks, there were wild stories circulating. Folks tried to explain what happened that afternoon. But the market settled down, and life moved on. For many individual investors, the market action seemed to be noise that day.
As the “noise” faded away, folks in our universe re-focused on saving, investing and planning for retirement. However, we eventually learned some “news” regarding the flash-crash.
In 2014, the world learned about Navinder Sarao. As a young man in London, Sarao taught himself how to trade stocks from his bedroom, starting in 2003. Over the coming years, he learned high-frequency traders were squeezing people like Sarao out of the market. So, Sarao built a system to outfox the high-frequency traders. We will never truly know precisely how much responsibilty Sarao held for the Flash Crash of May 6, 2010, but it appears he was involved. In 2016, Sarao was extradited to the US. He plead guilty to the brand-new offense of “spoofing” along with wire fraud. Both are felonies. It’s actually a fascinating story, which you can read here.
In hindsight, it’s easy to look back and state whether a period or an event was “news” or “noise.” In the moment, it’s is nearly impossible to tell the difference. It’s important to keep your long-range plans and goals in mind, and not let the daily headlines get in your way.
John retired in the last few years. We’ve had a few more of these “news vs. noise” conversations since that day we met in 2010. But we’ve stayed focused on the purpose behind the money he was socking away while working.
There will always be noise interfering with your vision of your goal. The real test is not losing sight of the goal.