Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 1

'Volatility' - what volatility?

Most investors focus on returns, but this paper is about the other side of the risk-reward equation: risk. More specifically, it is about volatility.

2012 was a great year for returns – but what about volatility?

2012 was a great year for investors just about everywhere in the world. Almost every stock market in the world was up (including Australia), every bond market was up (including Australia), commercial property was up in most countries (including Australia), and even gold was up. It was a very rare year in which every major investment asset class was not only up, but ahead of inflation and also ahead of returns on cash and bank deposits. Furthermore, every major asset class did better than its expected long term average return (while acknowledging that housing is a difficult 'asset class' to measure because every house is different, and we don’t have reliable data for Australia for 2012 yet).

But enough about returns in 2012. What about all that volatility we keep reading and hearing about in the media?

Risk’ v ‘volatility’

First we need to define risk and volatility. In designing and managing investment portfolios for investors I prefer to define ‘risk’ in terms of several real life risks faced by investors. These real life risks include: the risk of suffering a permanent loss of capital, the risk of running out of money, the risk of failing to achieve specific financial objectives, the risk of declining real purchasing power after inflation, the risk of failing to achieve specific cash flow withdrawals from the portfolio, and other critical investor-related measures.

On the other hand, finance textbooks define risk as ‘volatility’, which is expressed in terms of the variation of actual returns or prices around the average return.

‘These volatile times!’

According to the populist media, we are being told constantly that markets are experiencing unprecedented volatility and turbulence. This is the consistent and relentless message being conveyed by the media everywhere, including (and especially) the financial newspapers and those shrill presenters and experts on the 24/7 news and financial news channels. It seems every second sentence is peppered with alarmist terms.

We don’t listen to the populist media. We stick to the facts. Contrary to all the alarmist headlines, 2012 was in fact the calmest year on markets for at least half a decade, on any measure of volatility.

Measuring volatility using the textbook definition (the ‘standard deviation’) of daily moves of the All Ordinaries index, 2012 had the lowest average daily volatility of any year since 2005:

In fact, the real story of volatility on the Australian stock market over the past year has been the great decline in volatility in the years since 2008, to the unusually low levels of volatility at present.

A more meaningful way of measuring volatility is to look at daily moves, since it is the daily moves that grab the media headlines. We separate daily ‘up’ moves from ‘down’ moves because most people worry more about down moves.

In 2012 the average daily down moves were well below the long term average down move and were the smallest since 2005:

An even more targeted measure of volatility is to look beyond average moves to see how many big days there were, again separating the big up days from the big down days. No matter where we set the threshold for the definition of a ‘big’ day, 2012 was a very smooth year indeed.

For example, if we set the threshold at 3% as a big day, there were no big down days at all in 2012 (or any big up days either). Compare this to a gut-wrenching 17 days in 2008 when the overall market fell by more than 3%, including five days on which the whole market fell by more than 5% in 2008.

The above charts are for the Australian stock market, but it is the same pattern in all other major global markets. For example, 2012 in the US stock market was also the calmest year since 2005 or 2006 depending on the measure used.

The worst day of the year

The worst day on the Australian stock market in 2012 was Friday 18 May. It was a bad day coming at the end of a relatively bad week.

The week started with JP Morgan revealing another $2 billion derivatives trading loss (the ‘London Whale’ loss, which later turned out to be a $6 billion loss), the Greek parliament failing to form a coalition government after tortuous negotiations following the election, and the runs on Greek banks reaching a crescendo during the week, exacerbated by Moody’s downgrading of 16 major European banks on the Thursday (Europe time). To top it off, the European Central Bank started talking openly about emergency plans for a Greek exit from the Euro, the infamous ‘Grexit’. (Facebook’s disastrously mispriced float occurred after the market closed in Australia on that Friday, so it did not factor into Friday’s market here).

All of this had very little to do with Australia, but the local media were full of doom and gloom stories and many investors in Australia sold their shares in the media panic, causing the market to fall 2.6%.

So 18 May 2012 may have seemed volatile at the time, but it was mainly because 2012 was such a calm year. That is not to say that 2012 was not an eventful year. There were a host of reasons for investors to panic. There were rolling recessions in the UK, Europe and Japan, sluggish growth in the US, slowdowns in the major emerging markets including the prospect of a hard landing in China, political turmoil and rising violence in many countries, the fiscal cliff crises in the US and also in Japan, a global currency war, escalating military conflict between China and Japan, rising nuclear tensions in Iran, and North Korea setting off rockets over North Asia. On top of all this the local market in Australia was peppered all year with earnings downgrades from companies in almost every industry.

Yet, despite all of this going on, and all of the hype whipped up in the media about volatility in markets, 2012 was in fact almost dead calm.

In contrast, in 2008 was a volatile year. In 2008 there were 23 days (or 9% of all trading days over the entire year) in which the All Ordinaries index fell by more than 2.6%. That’s more than a whole month of trading days in 2008 that were each worse than the worst single day in 2012!

If the 2.6% fall on 18 May 2012 had occurred in 2008, it would have been seen as a quiet day when everyone would have let out a collective sigh of relief!

If we ignore the media hype and look at the facts, we see that 2012 was in fact a smooth sailing year on the market. Great returns and low volatility – investors could not wish for more.

 

Ashley Owen is Joint Chief Executive Officer of Philo Capital Advisers and a director of Third Link Investment Managers.

 

  •   4 February 2013
  •      
  •   

 

Leave a Comment:

RELATED ARTICLES

Bill & Ted’s (Not So) Excellent Sequencing Adventure

The ultimate investing hack: dividend growth stocks

Three underrated investment risks in retirement

banner

Most viewed in recent weeks

Warren Buffett's final lesson

I’ve long seen Buffett as a flawed genius: a great investor though a man with shortcomings. With his final letter to Berkshire shareholders, I reflect on how my views of Buffett have changed and the legacy he leaves.

13 ways to save money on your tax - legally

Thoughtful tax planning is a cornerstone of successful investing. This highlights 13 legal ways that you can reduce tax, preserve capital, and enhance long-term wealth across super, property, and shares.

The housing market is heading into choppy waters

With rates on hold and housing demand strong, lenders are pushing boundaries. As risky products return, borrowers should be cautious and not let clever marketing cloud their judgment.

Why it’s time to ditch the retirement journey

Retirement isn’t a clean financial arc. Income shocks, health costs and family pressures hit at random, exposing the limits of age-based planning and the myth of a predictable “retirement journey".

Taking from the young, giving to the old

Despite soaring retiree wealth, public spending on older Australians continues to rise. The result: retirees now out-earn the young, exposing structural flaws in the tax system and challenges for fiscal sustainability.

Welcome to Firstlinks Edition 637 with weekend update

What should you do if you think this market is grossly overvalued? While it’s impossible to predict the future, it is possible to prepare, and here are three tips on how to best construct your portfolio for what’s ahead.

  • 13 November 2025

Latest Updates

Investment strategies

Howard Marks: AI is "terrifying" for jobs, and maybe markets too

The renowned investor says there’s no shortage of speculative investors chasing AI riches and there could be a lot of money lost in the process. His biggest warning goes to workers and the jobs which will be replaced by AI.

Property

The 3 biggest residential property myths

I am a professional real estate investor who hears a lot of opinions rather than facts from so-called experts on the topic of property. Here are the largest myths when it comes to Australia’s biggest asset class.

Retirement

Australia's retirement system works brilliantly for some - but not all

The superannuation system has succeeded brilliantly at what it was designed to do: accumulate wealth during working lives. The next challenge is meeting members’ diverse needs in retirement. 

Retirement

Retirement affordability myths

Inflated retirement targets have driven people away from planning. This explores the gap between industry ideals and real savings, and why honest, achievable benchmarks matter. 

Retirement

Can you manage sequencing risk in retirement?

Sequencing risk can derail retirement, but you’re not powerless. Flexible withdrawals, investment choices and bucketing strategies can help retirees navigate unlucky markets and balance trade-offs.    

Retirement

Don’t rush to sell your home to fund aged care

Aged care rules have shifted. Selling the family home may no longer be the smartest option. This explains the capped means test, pension exemptions and new RAD exit fees reshaping the decision.

Shares

US market boom-bust cycles - where are we now?

This gives comprehensive data on more than 100 years of boom and bust cycles on the US stock market - how the market performed during these cycles, where the current AI uptick sits, and what the future may hold.

Property

A retail property niche offers a lot more upside

Retail real estate is outperforming as a cyclical upswing, robust demand and constrained supply drive renewed investor interest. This looks at the outlook and the continued rise of convenience assets. 

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.