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In recent days, weeks and months, the stock market has been extremely volatile: Stock swings of hundreds of points or 3-4% in a day are more common than ever. Big price fluctuations have been nearly six times more common since the start of this century than they were in the four decades leading up to the year 2000.
Some experts see these huge market swings as a problem because they undermine investors’ confidence and desire to invest, while others see the volatility as a big opportunity (though a big risk), because they can invest while prices are low.
But could this seemingly-constant volatility become the new norm? Quite possibly.
According to The New York Times, that could come to pass due to a combination of the following reasons:
- Computerized trading through which high-frequency traders now comprise up to 60% of daily turnover
- Extraordinary turmoil in the global economic markets, including stress over a potential Greek default (or bailout) and the downgrade of U.S. debt
- The faster pace of news and trading, which means that shifts in prices that would have taken days to spread in the past can now be condensed to mere hours
- Volatility itself—some economists speculate that the big market swings can erode confidence in the economy, which, in turn, leads to more volatility
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All the same, even if we’re experiencing permanently heightened volatility, the takeaway is clear: Don’t try to keep up with every ebb and flow. In the words of Alec Young, an equity strategist at Standard & Poor’s Equity Research, “The best thing people could have done last month is nothing.” He doesn’t think it’s smart “to be taking the temperature every day because you’ll be trading your portfolio till the cows come home.”
You can find the full article from The New York Times here.
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