Volatility Equals Opportunity
We steer clear of the foolhardy academic definition of risk and volatility, recognizing, instead, that volatility is a welcome creator of opportunity.
Seth Klarman
A whole generation of quantitative analysts have been taught that volatility equals risk. The thought process goes that if an asset price is more volatile, then it is much more likely to move against you.
So the more volatility in prices, the more risk in your portfolio.
I was taught that volatility does not equal risk, but rather that volatility equals opportunity. Indeed, if price action had zero volatility, then it would be difficult to form a trend of any sort! Price swings happen, which turn into longer-term trends, which allow us to track momentum shifts in the charts. And without volatility, none of that would be possible.
I would argue that the natural volatility in the markets is what makes technical analysis such a powerful technique with which to analyze market action. And because investors are inherently irrational, often trading on the power of emotions instead of the weight of evidence, their sudden actions can cause big swings in prices.
What’s so striking about 2025 is the incredible increase in daily market volatility. During the bull market of 2024, the benchmarks rarely closed up or down over 2%. In April 2025, that’s more of the norm than the exception. And given the rapid rise in the VIX, the market appears to be suggesting more of the same in the coming weeks.
VIX and S&P 500 index. Source: StockCharts.com.
I was asked recently on my daily market recap show about staying sane and centered during a period of market instability. What can you do to keep calm while it feels like the market is shouting at you, day in and day out?
First, get away from the screens. I’ve spent much of my adult life exploring mindfulness through journaling, meditation, music, nature, and pretty much anything else I can find. So now is not the time to let your mindful habits lapse! Make time to get away from the flickering ticks of the markets, and reflect on why you’re focused on the markets in the first place.
Second, zoom out. If you’re getting caught up in the short-term market movements, take a longer-term view to understand how the recent moves fit into a larger trend picture. Look for context, look for perspective, and bring in more data to do both.
Finally, revive your routines. It’s so easy during periods of market instability to abandon a well-documented investment process because “this time is different.” Your daily, weekly, and monthly routines can help you stay grounded in the core principles of market awareness, providing a clearer picture of supply and demand.
It can feel disorienting and uncomfortable during periods of elevated volatility. The good news is that constructive investing habits are not just for when everything is sunshine and uptrends! They work for the rough periods as well.
Mindless investors abandon their routines, making irrational decisions based on short-term shifts in emotions.
Mindful investors double down on their routines, ensuring that their decisions are based on the evidence.
RR#6,
Dave
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