Without understanding current levels of volatility, it is impossible to put day-to-day or week-to-week returns on the stock market into perspective. Do you know when you should be concerned and when you shouldn't?
If we refer back to my last column (Why we need to understand volatility), I presented a chart with the different regimes of annualised volatility clearly marked.
In the chart below, I show the same sort of information, but in a different guise – these are the weekly returns on the ASX200. The different stages of volatility, known as regimes, are shown in different colours and the dotted parallel lines are reference lines for when volatility reaches ±2% and ±4%.