It’s a fair question and one we’ve heard a lot lately with the DOW and S&P continuing to push into record territory. Our little bull market has grown up and is about to start third grade. We’re due for a correction right?
Maybe. Maybe not.
Our crystal ball is broken, and as our friends in the compliance department like to remind us, past performance is not indicative of future results. Looking out at the world today gives me plenty of reasons to be optimistic about the market. Combine this positive perspective with a steady approach to investing, a healthy understanding of volatility, and our belief continues to be one of consistent habits and a calm attitude.
Say it with me: “volatility is normal”. “Volatility is good”. Volatility is what keeps the markets moving, and a moving market means opportunity and growth. As investors, we tend to turn a blind eye when volatility is positive. After all, if our portfolios are growing what’s the issue? But we become hyper aware of it when volatility starts driving prices the other way. But in all of history, negative volatility has been temporary and asset prices eventually move higher.
Even if we take a more limited view, intra-year volatility is very normal. Have a look at this chart.
It demonstrates typical market corrections (market downturns) every year going back to 1980 – so the past 36 years. Notice the orange bars represent the low that the market hit that calendar year. And the blue bars, how the markets finished for that year. So what can you conclude? Well, the path to a positive year is almost never a straight one. On average, most years have a correction in the neighborhood of -14%, but in this past 36 years, an average return of 11.5% overall.
Who cares if the market drops 10% in February, only to have it rebound to +20% by September? The only people affected are those who jump out when the going gets rough, then jump back in when things are nice. Congratulations, that panic cost the investor 30%. In sports, timing is everything. In investing, this sort of timing is like your face to catch the ball. Subtle changes in investor behavior have the potential to destroy long term growth for investors. It’s the nagging thoughts investors all struggle with:
- “Things are crazy, let’s pull out and wait for things to calm down.” or
- “Let’s wait for prices to drop, then we can buy back in.” or
- “We’re in for trouble, I know it. Just look at all the bad news today.”
The problem with each of these approaches is they’re driven by emotion and emotion is a killer.
So let’s do a little role-playing. Stock prices are wiggling and the investor has decided to switch to cash. Then stocks go higher (whoops) or stock go lower (smart move!) Now that prices are lower, the investor has to decide when to buy in again. But the siren song of a positive price move is paradoxical – the investor waits until prices are rising and things are “looking good”. Makes sense, until you realize the investor has literally sold low and bought high. Repeating this cycle is a surefire way to destroy a lifetime of hard work and savings.
Wise investors understand that negative volatility is not only necessary, but healthy. A consistent investment strategy combined with negative volatility gives us an opportunity to acquire assets when they’re on sale.
Now I know what you’re thinking, why not wait for the “big sale” then buy everything then?
But this approach is equally flawed. It requires a guess, and guessing is another emotionally driven response.
For example, bread is $0.50 off at the grocery store this week. That’s a nice sale, but I think we can do better. The following week it’s $1.00 off. Not bad, but if prices continue to dive we can get a great sale the week after. But by the time week three rolls around, bread is back up to the normal price. Meanwhile, your family has starved because you were trying to “time” buying of bread.
Consistency is key. Keeping calm is key. A long term perspective is essential. There are so many wonderful things happening in our world that make me optimistic about our future. So many factors that will contribute to the long-term growth of our country, our society, and our potential. This is what we choose to focus on, and encourage you to do the same.
So if you know of someone who is looking for wisdom in their financial life, feel free to forward this article to them.
Thank you for being a client of Prosperion Financial Advisors.