Market Volatility: A Normal Part of the Investment Experience
Baseball legend Yogi Berra once said, "It's tough to make predictions, especially about the future." This holds true when it comes to timing the stock market. Investment markets have recently experienced a few years of very strong returns, but market volatility has returned in early 2022 in a big way. Veteran investors understand that market volatility is a part of the investment experience.
Stock market volatility is the frequency and magnitude of price movements, up or down. The bigger and more frequent the price swings, the more volatile the market is said to be. For example, when the stock market rises and falls more than one percent over a sustained period of time, it is called a "volatile" market.
Beyond the market as a whole, individual stocks can be considered volatile as well. You can calculate volatility by looking at how much an asset's price varies from its average price. Standard deviation is the statistical measure commonly used to represent volatility. During volatile times, some stocks are more volatile than others. Shares of an established large blue-chip company may not make very big price swings, while shares of a high flying and newer tech company may do so often.
Stock market volatility can speed up when external events create uncertainty. Currently, the potential conflict overseas, the Federal Reserve’s shift in policy and the resurgence of inflation have all been noted as contributing factors to the recent equity market volatility.
Volatility doesn’t mean that stocks are headed for a down or long lasting bear market. Even when there are market declines along the way, an investor can still experience reasonable returns over a long period of time.
WHY IS VOLATILITY SO IMPORTANT
By understanding how volatility works, you can put yourself in a better position to evaluate stock market conditions as a whole. You can analyze the risk involved with any particular security, and construct a stock portfolio that is a great fit for your growth objectives and risk tolerance.
It's important for investors to be aware that volatility and risk are not the same thing. For stock traders who look to buy low and sell high every trading day, volatility and risk are deeply intertwined. Volatility also matters for those who may need to sell their equities in a short time-frame, such as those who are older and closer to retirement.
For long-term investors who tend to hold equities for many years, the day-to-day movements of those equities should not affect their long-term plan. Volatility is partof the noise that could come while you are allowing your investments to compound long into the future.
Long-term investing still involves risks, but those risks, are most of the time, related to being wrong about a company's growth prospects or paying too high a price for that growth -- not volatility.
3THINGS AN INVESTOR SHOULD KNOW ABOUT A VOLATLE MARKET
One of the main reasons investors can get high returns over the long run is because occasionally they experienced and lived through downturns in the short run. Please note that:
1. Volatile times can create market drops that can be UNCOMFORTABLE, but they are not UNFAMILIAR. Downturns are a part of the investment experience.
2. Equity markets always offer Exit and Entry points. Over long periods of time, down markets are many times the best entry point for new or additional monies.
3. You make money in equities, when you BUY LOW and SELL HIGH. A bad emotional decision can lose an investor more money than any market correction.
YOUR FINANCIAL TIMELINE
Focus on your personal timeline instead of trying to time the market. During downturns, it may be tempting to pull out of the market, but you may miss out on a healthy recovery. Try to plan for your equity investments to maintain a long-term horizon and ignore the short-term fluctuations.
Remember, short-term movements of the market are unpredictable and do not abide by any average. For many long-term investors there is no reason to even subject themselves to daily market headlines. If you have a long-term investment horizon for your equity holdings of at least five years, chances are the current volatility will pass - possibly in a couple of weeks, months or at the most, a few years.
According to a JP Morgan analysis, even missing a few days of a market recovery can be costly. This analysis looked at the S&P 500 over a 20-year period (January 2000 to December 2019). Investors who stayed fully invested would have earned more than 6% annually. However, those investors who missed just ten of the days with the highest daily returns would have earned only 3% annually. During those 20 years, six out of the ten best days occurred within two weeks of one of the worst 10 days.
Market volatility should cause concern, but panic is not a plan. Market downturns do happen and so do recoveries. It is always healthy to confirm that you fully understand your time horizons, goals, and risk tolerances. Looking at your entire picture can be a helpful exercise in determining your strategy.
DISCUSS YOUR CONCERNS WITH US
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As a reminder, please keep us apprised of any changes, such as health issues or changes in your retirement goals. The more knowledge we have about your unique financial situation, the better equipped we will be to best advise you.
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