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Finance Questions, Answered: Does Volatility Matter for the Average Investor?


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Ken French
Roth Family Distinguished Professor of Finance

If you’ve been watching the stock market lately, you’ve probably noticed that stock prices are swinging wildly up and down from one day to the next. According to the New York Times, since the start of 2022, one in every nine trading days has closed with a change of 2.5 percent or more. Historically speaking, volatility today is on the rise, but it hasn’t reached the levels it hit during the dot-com boom and bust in the late 1990s and early 2000s, or during the financial crisis and recovery from 2007 to 2011. 

What does today’s volatility mean for the average investor? Opinions will vary. For Ken French, the Roth Family Distinguished Professor of Finance, the answer is: not much. Over the past thirty-plus years, French has not only been publishing cutting edge research papers and teaching, he’s also been working with Dimensional Fund Advisers, a global asset manager that applies academic research to practical investing. French’s research and investing experience have shown him that volatility is a product of uncertainty, and today there is a lot to be uncertain about: inflation, how the Federal Reserve will act, the war in Ukraine, supply chain disruptions, and the COVID-19 pandemic, just to name a few. “The job of the stock market is to incorporate everything that’s knowable into prices,” French says. “When so little is knowable, any information can have a big impact on expectations and prices. The result is lots of volatility.” 

In such an environment, French says, the average investor should probably hold the same portfolio they had before the current round of volatility. That’s because most of us lack the type of information that would give us an edge on the market. As French explains: “If you’re reading about it in the Wall Street Journal, that information is already reflected in market prices.” 

Of course, there are exceptional investors who can consistently beat the market. One of French’s favorite examples is Jim Simons, the founder of Renaissance Technologies, which is a remarkably successful investment management firm. It is reported that since the firm’s founding in 1978, Simons has personally reaped billions and billions in gains from the stock market. French is skeptical when his students interpret Simons’ success as evidence that they can also beat the market. “I look at Simons’ record and make the exact opposite inference,” he says. “I’m not going to try to beat the market because I expect Simons to take my money as soon as I open my wallet.”

The bottom line for French, and the mantra he’s been saying for years, is most people who think they can beat the market probably can’t.

This article was originally published in print in Tuck Today magazine.


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