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Stock market volatility

In a previous post, we have seen that the way an investor handle his or her emotions is key to determine if he or she will become a successful investor on the stock markets. This is true for any type of investments but this is even more relevant in the specific cases of stock investing. We have also seen that most individual stock investors vastly underperform the indexes. Not only they underperform the indexes but also a non-negligible part of them ends up losing money. One of the main reasons that help explaining why individual investors losing money on the stock markets is linked to their emotion reactions. They tend to be over excited after witnessing stocks rising a lot and tend to believe that stocks are terrible investments after they have suffered a period of losses. A good investor should be able to keep the same opinion on stocks as an investment over time and should not be distracted by temporary variations, a phenomenon that can be called volatility. Stock market volatility is in fact arguably one of the most misunderstood concepts in investing while being one of the most important ones. Simply put, volatility is the range of price change security experiences over a given period of time. If the price stays relatively stable, the security has low volatility. A brilliant investor should even go further and be so confident in his or her investment that when he or she notices prices going down, he or she should reinvest.

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