Global market ups and downs

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The recent, devastating news out of Japan not only tests the limits of global humanitarian efforts, but of the global economy as well.

Japan is the world’s third-largest economy, and fears are spreading around developed nations about how the disaster could impact a worldwide economy that has been recovering from the recession in fits and starts.

By the end of trading Tuesday, Japan’s stock market had plunged 16 percent over two days, but has recovered some as the Bank of Japan continues to pump liquidity into the financial system. European and U.S. markets are still falling sharply.

The volatility index, or VIX, sometimes referred to as the “fear index,” has risen again today, to 26.99 in late morning, its highest intraday level since August, according to Bloomberg. From 1990 to 2008, the average value of the index was 19.04, but in October 2008, it reached an intraday high of 89.53, as fears of a recession took hold. The index is the Chicago Board of Trade’s measure of volatility in the Standard & Poor’s 500 index.

Investors would do well to get used to volatility, especially in a global economy. Ajay Kapur, head of Asian Equity Strategy at Deutsche Bank, was quoted in February affirming that volatility is not only here to stay, but will increase tenfold. That’s because the world’s economy is dependent on spending by the rich, and luxury items are not necessities. Therefore, stocks of luxury companies have a more volatile earnings stream, he says, than the average stock on the Dow Jones Industrial Average.

In a well-diversified financial plan that takes into account your timeline for needing income, the ups and downs of the stock market are the price to pay for long-term returns.

Are you staying the course in the market, or is the volatility keeping you up at night?

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