What should I do when the market gets volatile and scary?
For those who constantly keep up with the stock market, you know there’s been a lot of media attention on the recent volatility. This article is to help you cope with that. For those of you who aren’t concerned with short term fluctuations, keep on keepin’ on. Hopefully this is still a great educational piece for you and will help you justify your lack of daily interest in the markets.
What has the stock market done for me lately?
Let’s start with the recent events in the stock market. Over the past few years we have seen tremendous, steady growth. In fact, from February 28, 2013 to February 28, 2018 the MSCI All Country World Index All Cap Index (represents global stocks of all sizes, with 14,481 stocks represented) had an annualized return of 10.77%, with its greatest year coming in 2017 (a return of 24.63%).
We often use standard deviation as a measure of volatility for stocks, as it measures how much the price has fluctuated up or down. For those same five years, that index’s standard deviation was 10.24. This is much lower than its 10-year figure of 16.91.
Again, we’ve seen tremendous growth, without much short-term fluctuation. As imperfect human beings, we are susceptible to recency bias. This causes us to use our recent experience as a baseline for what will happen in the future. In reality, the last couple years have been more the exception than the rule.
Nonetheless, when the markets went haywire in the beginning of February, the media immediately began their dramatic interpretation of what was going on. They painted a scary picture and created ‘scaredy cat’ investors. It’s never comfortable to see that kind of volatility, but it’s more the norm than the past couple years have been. According to JP Morgan’s Guide To The Markets, from 1980 to 2017, the average intra-year decline for the S&P 500 was 13.8%. Of those 38 years, 29 ended with positive annual returns. That’s why it’s important to keep a longer-term perspective.
Okay, so what do I do?
Jack Bogle is famous for many reasons. He’s the founder of the Vanguard and a strong proponent of passively managed index funds. One of his popular quotes for times like this is “Don’t just do something, stand there.” Just like this quote, a disciplined investment approach can often feel counterintuitive. However, in times of volatility, the best action is to stay the course and remain disciplined.
What should I expect?
As financial planners, an important part of our job is setting appropriate expectations for our clients. Part of that includes explaining our investment philosophy and approach. In the very beginning, your portfolio should be constructed in a manner you are comfortable with, even in times of decline and higher volatility. Corrections of 10% or more in a year are normal. No one can accurately or consistently predict when they will happen, so of course your portfolio should be built with your comfort and a long-term, disciplined approach in mind.
In times like these, it’s important to keep your goals in mind and focus on only those things you can control. With regards to investments, that’s your allocation. Build a portfolio to last on the front end and stay the course. If you need help with that and are interested in learning more about my investment philosophy, contact me for more information.