Putting the Recent Market Volatility in Perspective

The stock market has had a rough few days. By Monday morning, the S&P 500 was about 8% off its high. Other parts of the market were down even more—the Nasdaq tech-heavy stocks were down more than 12%.

The recent volatility feels abrupt amid one of the market's calmest periods in years. Equity investors didn’t have to deal with much volatility to get positive returns this year, but that changed over the past few weeks. And it could get worse before it gets better. But let’s put this recent correction into context.  

Over the last roughly 100 years, the market has had a 5% dip just about every year (95% of the time) and a 10% drop the vast majority of years (about 2/3).

S&P 500 or related index

What we’re experiencing right now is perfectly normal. The calm markets we experienced during the first part of the year were quite abnormal.

Despite how regular it might be, it doesn’t make going through them any easier. Here are a few principles to remind yourself of when stocks start to slip:

1—Diversification wins. While the market is screaming up, everybody wishes they were invested in only the highest growth sectors of the stock market. But times like this remind us why we spread things out. For investors withdrawing from investments, the bonds & cash provide a source to take from while waiting for stocks to recover.

2—Time horizon matters. Many investors invest in the same thing but with very different time horizons. There are day traders, institutions, pension funds, retirees, millennials—the list goes on. If you structure your investments properly, the portion down right now shouldn’t be touched for a long time.

3—Unfortunately, this is the cost of playing the game. Stocks have earned fantastic returns of roughly 10% per year over the past 100+ years. Stock investors earn that premium return because of their willingness to deal with what we are going through right now. The finance industry refers to this as the “risk premium.” If these drops didn’t happen, stocks would not earn that high return. In the long run, we are better off with the volatility than without.

Happy Planning,

Alex 

This blog post is not advice. Please read disclaimers.