A BIG-PICTURE VIEW OF MARKET VOLATILITY

This "Financial Focus" column is prepared by Edward Jones Investments, headquartered in St. Louis. Jones includes branches throughout the nation, including Cape Girardeau and Jackson.

Volatility and risk are two concepts that deter many potential investors from the stock market. Although the two concepts are related, they are not synonymous. Understanding volatility and how it differs from risk will increase your understanding of the way the market works and why stocks are still the best investment vehicle for long-term investors.

Volatility in the stock market refers to movement -- up or down. Some call it fluctuation. Whichever term you prefer, the fact is that no stock price remains the same. There are always buyers and sellers, and the price of a stock changes in relation to supply and demand.

If demand is up, there are more buyers and the price of the stock goes up. When there are more sellers, the price of the stock goes down. If it drops low enough, it attracts buyers, and the cycle continues. In the stock market, the principle of supply and demand creates fluctuation, or volatility.

Risk, on the other hand, is the perceived possibility of loss. For example, during market declines, or downward fluctuations, you could see a loss in the market value of your stocks. Of course, you lose only if you sell your securities at that time.

Investors who understand the volatility of the market know that fundamentally sound stocks rebound. These investors are in for the long term. They weather the storm, stay the course and have historically been rewarded for their patience. Here is a little market history to illustrate this fact.

The years between 1972 and 1982 were a time of strong growth for small-company stocks. During this period, these stocks generated a compound annual return of nearly 20 percent. With returns like that, you may be surprised to learn that during that same period there were three major market declines.

If the cumulative annual change in the value of a $10,000 investment in small-company stocks during those years were shown on a chart, you would see an upward trend line rising impressively over the 10-year period. It would be apparent that short-term fluctuations generally smooth out over time.

However, if you looked at a chart showing the month-by-month percentage returns of small-company stocks during that time, you would see jagged up-and-down spikes. That's because a short-term perspective tends to amplify price movements. Short-term fluctuations can blur the focus on long-term upward trends. Checking prices on a daily basis can make an investment look more volatile than it might really be over the long term.

Concerned about market volatility? Avoid losing sight of the long-term movement of your investments by focusing too intently on day-to-day activity. It's the big picture, rather than short-term snapshots, that should capture your view.

The Southeast Missourian does not recommend that readers buy or sell stocks featured in this column, which is provided for informational purposes only.