Perspective On Recent Market VolatilityJake Steele, Wealth Advisor
With the market down overnight and the Dow Jones Industrial average -4.6% yesterday (Feb 6th). We think it’s time to put this in perspective. On October 19th, 1987 the Dow was down 22.6%. This was the biggest loss in the 100 plus year history of this market. Two days later the Dow was up 10.15%. If you bought the S&P 500 on that day and held your investment until this past week it would have given you a compounded annual growth rate (CAGR) of 10.9% or a total return of 2123%. The Nikkei (Japanese stock market) since 1987 would have given you a CAGR of 0.4%. Yesterday was not 1987.
What does this tell you? Buying into fear has worked out very well, but you must be diversified because you do not know where the returns will come from in the world.
What is occurring in the markets today may seem scary or abnormal, but what has been more abnormal is the lack of volatility in the market over the past few years. The S&P 500 went 404 days without a 5% correction until today. This is the longest in the history of the market. Since 1927 the S&P 500 has averaged a correction of 5% every 3.5 months. “Corrections” happen every year and recessions are part of the business cycle. If you are invested in the market you should expect these things. We get more worried when they don’t happen.
So, what does this all mean? If you are invested for the long term you should expect market volatility. Volatility is part of investing and you should have an advisor who understands the level of volatility that you can handle.
If you cannot handle high volatility in your portfolio then you can choose to be in more conservative investments that are not as correlated to indexes like the S&P 500. Assuming that you have the right advisor, he or she will have you in the right mix of investments, so you will not experience the same volatility as being in the Dow or S&P. If you are diversified globally, have a good mix of investments in your portfolio, and you are committed to long term investing then you should not worry because capital markets work and over the long term they will go up.