For the first time in two years, the market is down 10% from its highs. We mentioned in January – when the market was rocketing higher – that we should expect some good volatility after a year when we didn’t experience any. Well, it’s finally here!
Now the question that we are getting from many clients is: should we be worried about the volatility? Our short answer is: no, you shouldn’t. We have two reasons why.
First, the chart of the day, coming at you from JP Morgan. This shows each year’s market performance and volatility since 1980.
For example, the market went down 17% (red dot) during 1980, but finished the year 26% higher (solid bar). In 2009, the market went down 28% but finished the year up 23%. In 2017, the market dipped only 3% at one point, but finished 19% higher.
Here’s the important part to remember. In an average year, the intra-year decline in the S&P 500 is 13.8%. In 29 of the 38 years shown in the chart, the S&P 500 finished with positive returns after those declines occurred.
So what does this mean? Volatility is normal. It is the price you pay for positive returns and growing your wealth.
Second, most of our clients have longer-term investment goals and time horizons. A two-to-four month downturn in the market does not destroy those plans IF you stay focused on your long-term horizon and ignore the short-term movements. We talked about this at length in one of our most important podcasts in the last six months, “How Uncertainty Can Help Your Financial Future.”
The only way short-term volatility can have a negative impact is if you make rash or fear-based changes to your strategy, like moving out of equities and into cash or gold.
Bottom line: focus on your long-term goals and objectives, take advantage of short term volatility by putting more cash to work, and go for hike instead of turning on CNBC (which is scaring everyone to death with their reporting).
Here’s to wise investing,