Is Stock Market Volatility a Bad Thing or a Good Thing?

Is Stock Market Volatility a Bad Thing or a Good Thing?

Spoiler alert – it’s a good thing.  There, I just saved you a few minutes of reading. : )

For the A students, let me elaborate.  Volatility is one of the key drivers of the historical higher returns of stocks.  People have to be rewarded for the bumpier ride that stocks usually take over say bonds or savings vehicles from the bank, like Certificates of Deposit (CD’s).  If it was always a smooth ride then there would be no need for the reward – historically higher returns – in stocks.  Everybody would want them if it was just a smooth ride up…but since it’s not a smooth ride the returns have historically been a lot higher than bonds and CD’s to reward investors for the volatility they had to endure.

Key point: volatility is in no way synonymous with risk.  Risk is when you could lose all your money, volatility is just the short-term fluctuations of an assets price.  You may be mistaking normal equity volatility for loss, which it isn’t, unless you sell in fear during a down market.  Obviously, one must consider their risk tolerance, and ability to handle these types of fluctuations in their investments.

Let’s look at history to show this – I will reference the S&P 500 index as my proxy for “the market”.

There have been thirteen bear markets with an average decline of 30% since the end of World War II[1].  The first one started on May 29, 1946.  That day, the S&P Index closed at 19.5.  Today, thirteen “ends-of-the-world” or bear markets later, the index value is 2813 – the day of my writing this.  Stocks are up nearly 144 times over those seven decades and guess what? Earnings are up nearly 144 times over that same time frame.

(To see a Fact Sheet on the S&P 500 index, put out by Standard and Poor’s, follow this link: http://www.spindices.com/indices/equity/sp-500 )

That’s a heck of a lot of volatility to endure since 1946.  Yet, if someone just left their money alone in an S&P 500 index fund their portfolio would be up nearly 144 times (gross of any fees and expenses)   So it’s not the volatility that creates a loss for investors, as just illustrated by their investment being up nearly 144 times, it’s their own behavior.  Selling is how a real loss is created, not riding out the volatility.

One more historical point.  The average intra-year decline since 1946 has been 13.8%[2].  There has been a 15%-20% decline on an average of one year in three.  The last one occurred in 2011 and was 19.2%.

Takeaway, markets are cyclical.  And those of us that BUY during corrections vs. sell, generally speaking, reap the rewards of volatility.  Because without that volatility, the returns wouldn’t have been as great.

So that is why volatility is a good thing and should be embraced if you are investing for the long term.  After all, it is one of the reasons for the historically higher returns.

[1]http://www.griequity.com/resources/InvestmentIndustry/Techdata/vanguard130yrsreturns.html

[2] https://am.jpmorgan.com/us/en/asset-management/gim/adv/insights/guide-to-the-markets/viewer   (Page 13)

The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S. Please note an investor cannot invest directly in an index.

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results.  This information should not be relied upon by the reader as research or investment advice regarding any funds or stocks in particular, nor should it be construed as a recommendation to purchase or sell a security.  Past performance is no guarantee of future results.  Investments will fluctuate and when redeemed may be worth more or less than when originally invested.

2156482/DOFU 7-2018

The 3 Keys to Successful Retirement Preparation

The very first question you need to ask yourself when you decide to retire is, “What will it cost to continue to live the lifestyle I am accustomed to and WANT for the rest of my life?”  That may seem like a difficult question to answer, and it can be if you don’t go about it the right way.

The very first step to answering that question is to lay out your current expenses, including your household budget and any other basic, daily living expenses you have.  Once you have determined your household budget and other daily living expenses, the next important question should be…

“Where is the income going to come from?”

In order to retire safely and stay retired, I believe every retiree needs to consider the following 3 things:

  1. A Source of Income to Cover Expenses

This may seem obvious but you would be surprised at how many families I have worked with who didn’t account for the loss of some social security benefit after one person in the couple passes away.  Or, the reduction in pension income if the person who the pension is tied to passes away.  You will benefit greatly from a financial strategy that aims to create an income stream that you will not outlive no matter what, and one that can support your needs in retirement.  This will take care of the basic expenses that you will encounter in retirement (i.e. house payments, utilities, insurance, etc.)

  1. An Emergency Fund

You will need to determine the right amount of capital needed to account for any unforeseeable emergencies in your future.  The purpose of this surplus money is to be used in the event of an emergency such as medical expenses, natural disaster, car or appliance repairs, etc.

  1. A Strategy for Inflation

This may be the hardest part to prepare for, because inflation happens every single day…and we never know how much it will be year to year.  This can make it difficult to determine the exact amount needed to prepare.  However, this money is set aside to compensate for inflation over the period of your retirement.  It can be beneficial to break down your basic expenses and account for each one that will be affected by inflation.

Once you have identified these things, then comes the next step of putting a strategy together to accomplish everything.  Resources on that topic are throughout this website and also in my book, How to Turn a Lifetime of Savings into Income for Life which you can requested on the right hand side of this site.

As always, if you feel I can be of help on your journey please email or book a 25 minute phone session with me – a link to my online calendar/scheduler is also on the right hand side of this page.  I will do my absolute best to help and if I can’t, I will try and point you in the right direction.

1373822/DOFU 12-2015