Wednesday, January 12, 2011

Today’s Markets are so volatile! Are they?



If you look at long term stock market charts, it seems that today's market swings are worse than ever before. Even the 1929 and 1987 crash are puny compared with today's volatility!

This is a bit of a spin-off from the previous post where we simulated a 30 year stock market index chart, starting at an index value of 100 and with a 10% average annual appreciation rate. Remember this chart in figure 1? See those enormous volatile swings in the last five to ten years? The trouble in earlier years seems to be puny in comparison!

Well, don't be fooled! These are absolute numbers not relative numbers! Percentage wise the swings in the early years are just as severe as the later ones. It is the scale of the graph that makes the past seem so much easier and simpler than today. Below is the same graph but only for the first 15 years and since the market value was not that high in those earlier years, the Y-scale (value scale) has been lowered to appropriate for that time (Max value is $1000). See how volatile those past markets were? It's a matter of perspective!

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