Market volatility unnerving, not unusual

The stock market's swings have made it a tough year for investors who check the balances on their investment accounts with any frequency. But as painful as they might seem, the gyrations aren't unusual.

It's easy to see how anyone might lose perspective when days with triple-digit moves in the Dow Jones industrial average feel almost commonplace.

The volatility in the past 12 months is "a little elevated" but not extraordinary, said Francis Kinniry Jr., a principal at Vanguard Group and co-author of a study examining stock market fluctuations.

Kinniry believes many investors aren't used to volatility, but it's not uncommon or something to fear. "If (the market) can go 400-600-800 on an up day, you should expect the same on the downside," he said.

It doesn't help that investors' memories can be short. From 2004 through 2006, volatility was low by historical standards, so even a return to normal levels might seem scary.

And of course big down moves are harder to take than big gains. Kinniry said many investors, even professionals, had been lulled by a streak of largely uninterrupted gains in stocks. From 1982 to 1999 there was only one year when the market was down. "There has typically been one (down year) in every four years," he said.

Market declines can be dispiriting and even frightening, but big moves might simply underscore uncertainty and not necessarily portend a calamitous pullback.

Mark Travis, chief executive of Intrepid Capital Funds, encourages investors to sift for opportunities amid the wreckage. "Maybe it's a time to add to your positions. Hold your nose, close your eyes and jump when they get cheap," he said.

Kinniry said it's important to understand that volatility is part of the risk investors accept by seeking the higher returns stocks historically have offered, on average. "If investors can have expectations for this volatility, they may not panic or do the wrong thing when they see it," he said.

To determine how much risk they're willing to tolerate, investors should try to imagine how they would react if their portfolio suddenly fell sharply. Kinniry encourages investors to think in terms of dollars. When such drops occur, having a plan in place can help investors avoid making hasty decisions, Kinniry said. "It's no different from thinking about what you would do in a fire drill or in an evacuation in a hurricane."