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

As We Head Towards Dow Jones 20,000 And Turn The Page On 2016…

Disclaimer:  I wrote this article in early January 2017, but this information should still provide value.

As we head towards Dow 20,000 and turn the page on 2016, now is the perfect time to map out your financial resolutions for the New Year and beyond.  Here are a few suggestions for making 2017 healthy, happy and successful:

  1. Create emergency savings

Life is full of unexpected emergencies, and having extra cash on hand can help keep a serious illness, home repair, or other sudden financial need from derailing your finances.  Prepare for unpredictable expenses by putting aside the equivalent of three to six months of expenditures.

  1. Make a monthly budget and stick to it

Budgets may sound like a lot of unnecessary work, especially if you’re financially comfortable.  But if you’re not tracking your spending, you may be surprised by how quickly it adds up – and which expenses are costing you the most.  As 2017 begins, set a budget and work on sticking to it for three months.  Track your performance and revise the budget, as needed.  Don’t aim for perfection, instead, try for incremental improvement.

  1. Save more for the future

Creating a disciplined savings strategy is an important way to stay on track for your retirement and other goals.  We recommend keeping separate “buckets” of savings for short- and long-term goals.

  1. Make retirement plan contributions regularly (instead of all at once)

Even if you’re diligently saving, you may be among the 71% of Americans who haven’t put aside enough money for retirement.  One key change you can make is to take advantage of “time in the market”.  Instead of waiting until the last minute to make your annual contributions, give your money more time to potentially grow by making automatic contributions to your account every month. (Source: Washington Post)

  1. Maximize your retirement-plan contributions

Tax-managed retirement accounts are one of the most powerful ways to save for a more comfortable retirement, because they allow you to control your tax liabilities today – while potentially accumulating assets for the future.  Make the most of these accounts by contributing as much as you can.

  1. Pay down high-interest debt

Did you know that 54% of Americans believe they will never pay off their debts?  Don’t let high interest debt keep you from getting ahead financially.  If you’re carrying a significant amount of debt, make paying it down a top priority. (Source: Associated Press)

  1. Create a powerful legacy for the world

We believe that a rich life involves more than financial success and a comfortable lifestyle.  Whether you want to leave something to your loved ones or support causes you care about, take time to address the legacy you’d like to leave.

  1. Review your estate planning and legal documents

Your core legal documents need regular reviews to ensure they keep up with any changes in your life.  If a few years have passed since you looked at your documents, dust them off and make sure that they still represent your wishes.

  1. Stay on top of your health

Healthcare is a major expense for most Americans, especially if serious illness strikes.  Take steps to protect your well-being by building a healthy lifestyle and prioritizing preventative care.

  1. Involve your children and grandchildren in your finances

Fostering financial wisdom is a powerful way to help your children and grandchildren build a solid, stable life – and help ensure you’re able to pass on your values and wealth in the future.  Rather than keeping your finances private from your loved ones, we recommend including them in conversations about your goals and priorities.

Think long-term, not short-term.  Recently, we’ve spoken to many clients who want to ride the post-election growth train.  Just as we’re here to help you from despairing when stocks tumble, we also want to help control the euphoria when markets rally.  This has been a narrow rally, and rallies don’t usually continue forever.  Impulsive choices can challenge your long-term objectives.  As always, it’s important to take the right amount of risk for your unique circumstances and stay focused on the long-term goals that we are pursuing together.

Have a Safe and Happy New Year!

 

2011373 /DOFU 02/2018

What do you think about the market?

Once in a while I will meet someone new and they will ask “what do you think about the market”?   Most often they are referring to the stock market.   Typically, if I probe deeper, they want to know if I think the market is headed up or down in the near future.  My response, the same I have given for over 15 years, is – I don’t know.  Anyone who tells you they know, is not telling you the truth.  No one knows and no one ever will.

I wish I had a more elaborate answer then that, but I don’t.  Sometimes the simplest answer is the best one.  I will leave you with a quote that I find of tremendous value:

“Basically, price fluctuations have only one significant meaning for the true investor.  They provide him or her with an opportunity to buy wisely when prices fall sharply and sell wisely when they advance a great deal.  At other times they will do better if they forget about the stock market.”

– Benjamin Graham, Author, The Intelligent Investor, 1949

Investments will fluctuate and when redeemed may be worth more or less than when originally invested.  Past performance is not indicative of future results. 2011308/DOFU 1-2018