CHICAGO, June 29 (Reuters) – Portfolio volatility is your
sworn enemy if you’re nearing retirement or market downturns
make you nauseous. But if you’re a buy-and-hold investor – and
believe that stock market risk diminishes over time – you still
need a new course of action.
With high-frequency robotic trading, exchange traded funds
and global news hitting markets at the speed of light, there’s
no reason to believe volatility is going away.
Recent research by Lubos Pastor of the University of Chicago
and Robert Stambaugh of the University of Pennsylvania confirms
this view. In a forthcoming piece in the Journal of Finance,
they examined 206 years of stocks returns and confronted the
conventional wisdom that stock risk declines over time.
“We find that stocks are actually more volatile from an
investor’s perspective,” they concluded, citing “uncertainty
about future expected returns” as a major factor. The
Lubos-Stambaugh paper seeks to refute earlier research by
luminaries such as Jeremy Siegel, also of the University of
Pennsylvania, who claimed that stock market risk is reduced over
long holding periods. His book “Stocks for the Long Run” was a
bestseller before the dot-com crash.
In the wake of the 2008 meltdown, there’s ample evidence
that volatility has been increasing. You need only look at the
calamity of the past few years to know that conventional
investing has been a gut-wrenching roller-coaster ride.