Volatile stock market poses no worries for most investors, Tiu says

Despite the volatility in global markets this week, most investors don’t need to worry in the long term, says School of Management faculty member Cristian Tiu, an expert in stock markets, risk management and asset allocation.

According to Tiu, when it comes to stock prices, uncertainty brings volatility. In the short term, we mainly fear three things:

• That China may slow down — and it has, even as the government helped pump money in the economy.
• That the Fed will increase rates in September, which will slow economic growth in the U.S., but also attract flows with higher rates.
• That we will export less because other currencies will get weaker relative to the dollar.

“Uncertainty regarding how these issues are resolved is making stock prices move as extremely as we see them,” says Tiu, associate professor in the Department of Finance.

“For average investors who are in the equity markets for the long run, there is little need for concern,” he says. “Only those who make real economic decisions based on the level of markets at a particular point in time should be worried.”

For example, Tiu explains, investment managers whose bonuses depend on the market returns should be worried. Or a university expecting donations from someone whose wealth is in the stock market may worry. But the normal investor has no cause of that yet.

Tiu also points out there are investment funds selling insurance against events people worry too much about, but that turn out to never happen — and these investors make money on that. As always, it would be useful not to focus on fear and on guessing where the market goes, but instead on being productive and how we can contribute to real economic growth.