The last few days — and indeed the last few months! — on the stock market have certainly been volatile and might have some thinking its time to throw in the towel. In volatile times, it’s important to consider what your long-term game plan is.
If your aim is to own shares in a diversified portfolio of quality companies, purchased at reasonable prices, that over the long run will grow their earnings and pay you dividends, then you should view volatility as your friend. This is the investment philosophy of a long-term investor, as opposed to a trader or speculator who is constantly buying in and selling out of stocks and worrying about every percentage point move.
It’s amazing what happens when you step back from worrying about every little change in your portfolio. Consider three defensive blue chip stocks – Woolworths (ASX: WOW), Telstra (ASX: TLS) and Westfield (ASX: WDC). These companies have very steady earnings streams, those earnings — as opposed to their share prices — do not jump around whimsically every day.
However, watching their share price movements every day could easily make you think their earnings are constantly in a state of flux. Here is a chart of the share price movement of the blue chip companies mentioned above compared with the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) over the past week.
As the chart above shows, the share prices were all over the place and it is really just ‘noise’. Foolish investors know better than to watch this noise constantly, as their time is better spent understanding and valuing companies. Next, let’s look at a chart of the last month.
Investors who are overly focussed on prices will see this monthly chart and think it is an alarming trend and no doubt start worrying. However once we step back and look at the quarterly chart below, in context the last month doesn’t look too bad!
So, after three months of daily ups and downs and worries, overall the performance of these three blue chip companies is pretty flat and you could rightly surmise that things look pretty benign. However its really from this vantage point and longer that things start to get much more interesting. A check of the six-month chart shows the index is up 2.5%, while our three blue chips are up between 4.8% and 8.7%. While the chart below shows that over 12 months not only has the index returned an impressive 16% but our three blue chips have handily outperformed the index.
The old saying “can’t see the forest for the trees” is an apt way to think about being overtly focussed on the short-term gyrations of the stock market. As an investor, becoming too involved in short term price movements will not allow you to clearly understand the situation or the bigger picture.
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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.