Are Shares Really More Volatile Now?

roller coaster

The Straits Times Index (SGX: ^STI) ended Friday, 14 June 2013’s trading session at 3,161, sitting on a 1% gain from Thursday’s close of 3,131. Despite breaking the duck of three consecutive losing days starting last Tuesday, the index’s still down by 9% from its 52-week high of 3,465 that it reached less than a month ago on 22 May 2013.

At the STI’s peak, its 30 components were collectively worth almost S$290b, so that’s a harrowing S$26b that has been shaved off the market in three weeks. That might naturally raise a question – “Has the market become more volatile lately?” And to some market participants, they might certainly feel that way.

To find out if the stock market’s indeed become more jumpy lately, I downloaded the daily points-change history for the STI from Yahoo Finance stretching back to Jan 1988 to see if huge daily movements have become more prevalent in recent years.

The graph below shows the number of days where the index had a 5%-or-more daily change (both gains and losses) with a repeat of the exercise for a 3%-or-more daily movement.

There’s nothing too interesting about the graph, except to show that it’s rather rare for the index to experience a change of 3% or more in a day – there’s more than 6000 trading-days from Jan 1988 and June 2013 but there was only 208 days where the index swung upwards or downwards by more than 3%.

Shares really more volatile - daily points change

Now, the data becomes interesting if we split up the time frame into three distinct periods; the first being Jan 1988 to Dec 1999; the second being Jan 2000 – Dec 2009; and for the last we have Jan 2010 to June 2013.

If the stock market had indeed become more volatile, then we would expect a larger percentage of the large points-swing to appear in the second and third period.

But, based on the graph below, we’re actually seeing a larger number of days with a 5%-or-more daily swing in the STI in the first period. In fact, there wasn’t even a single day in the third period where the index had experienced a 5% swing!

Shares really more volatile - daily points change 2

As I suspected, all the international financial troubles such as; the Eurozone debt-issue with Greece and Cyprus; the American Fiscal Cliff; the Chinese hard-landing; the quenching of America’s Quantitative Easing programme; Japan’s struggle against deflation after the launch of Abenomics; and  many other problems that happened in the past three years, did not make our markets more volatile.

Foolish Bottom Line

As humans, our brains tend to fall prey to the “recency effect”, where we tend to over-emphasise recent outcomes over long-term experiences. So, despite the market being up close to 13% from 14 June 2012 (that’s 12 months ago), we look at the recent falls and think that the market’s being falling a lot more violently and with greater frequency than usual. But, the graphs above show that the market has not become more volatile.

As investors, we must not forget that it is normal for markets to move up and then come down. If we’re scared away by the market’s normal ebb-and-flow, we’ll have missed out on a 280% gain from the STI’s climb from 833 points on the start of 1988 to 3,161 today as listed-businesses in Singapore slowly chalk up larger profits and become more valuable.

It’s not uncommon for pundits or ‘experts’ to exploit fear and pronounce such market movements to be abnormal volatility at work. Me? I call it normality.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.