The recent uproar in the stock market has caused volatility to return to the forefront. Since the shocking drop on May 6 2010, which featured a 9.6% fluctuation from the highest point to the lowest point of 1065.75 for the S&P 500, the market has been bouncing up and down without any clear indication as to where and when it will settle. This volatility, shown in the chart below, is nowhere near the extremes observed when the credit crisis began at the end of 2008. However, the current volatility is back up to levels seen during other tight economic times.

As a result of the tech bubble in the late 1990’s, stocks became tremendously overvalued for an extended period, and then came down in price once that bubble began to burst. The volatility that ensued lasted for several years as economic uncertainty made it very difficult for investors to pin down where fair market value should be. A similar event happened after the S&L crisis of the early 1990’s, but to a lesser extent. Considering the extreme market moves of the past few years, it’s not surprising to see a return to volatility, which is likely to remain a characteristic of the market for some time to come.

This makes it even more important to have a disciplined investment plan with a long-term investment horizon, to help weather capricious market moves.

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