Volatility has returned to markets with a vengeance, but is this something to fear or embrace? It depends entirely on your perspective and preparation. When markets plummet, most investors panic. But what if market downturns actually represent opportunity? For younger investors with decades ahead, buying assets at discounted prices might be the best possible scenario. As Meb Faber points out, "You want to dollar cost average when stocks are at a PE of 10, not a PE of 40."
The conversation delves into the nature of market volatility itself. Historical data reveals that approximately 70-80% of the market's best and worst days occur when prices trade below their 200-day moving average. This volatility clustering means big down days and big up days tend to happen close together - a phenomenon that quantitative approaches can potentially exploit.
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Perhaps most illuminating is the discussion around what true diversification actually means. Many investors believe they're diversified simply by owning the S&P 500, failing to recognize they're only exposed to U.S. large-caps. Genuine diversification extends across asset classes, geographies, and strategies - particularly important when correlations tighten during market stress.
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