By Allen Ostrofe, MBA, CFP®
Last week, Bob and Myra, young physicians from Sacramento, called about recent U.S. markets’ performance. Various headline-seeking media pundits had again used the questionable words “jittery”, “uncertainty”, “risky”, and “crash” (heard last week in my gym class). However, Bob and Myra had always heard “check your emotions”, and “listen to the rest of the story before drawing conclusions”. Is it possible that there is a parallel between Lewis Carroll’s most famous nonsensical poem included in Through the Looking Glass, and current media hyperinflammatory markets’ headlines?
A historical perspective
Let’s take a historical perspective. Markets’ volatility is a measure of how far prices move up and down (some people mistakenly associate volatility with market corrections). Historically, the average twelve-month volatility, or standard deviation, of the S&P Index is about 15%. Intra-year pullbacks are quite common in U.S. stock market history. From 1979 to 2017, the U.S. stock market (as measured by the Russell 3000 Index) had an intra-year decline of 14%. For half of the years during that period of time, the market had intra-year declines of more than 10%. Despite the substantial intra-year declines, the calendar year returns were positive in 32 out of 37 years. S&P 500 showed similar intra-year average pullback of 14% but had positive returns in 28 of 37 years. This shows how common short-term market declines are, and how resilient the markets are over longer periods of time. Thus, volatility is higher over shorter periods of time. For example, you will see more down days than you will see down months, and more down months than down years. And you won’t see many down decades or multi-decade periods.
The recent short-lived downturn of U.S. markets of 5-6% was above daily historical movement. But, to place that in perspective, the U.S. markets, e.g., the S&P Index has historically experienced a median daily volatility of 1.4%. It was as high as 5% during the financial crisis in 2008, and as low as 0.5% in 2017. To place that 1.4% in perspective, the oft-quoted Dow Jones Industrial Average would have to move up or down over 350 points daily just to meet its historical average! That is why it is so important to gauge volatility by percentages, not by points. Why do U.S. markets look relatively volatile right now? Because we are comparing them to 2017, a year where we experienced the least amount of volatility in 15 years!
So, recent U.S. markets’ activity is not remarkable at all. Early October pullbacks had only taken us back “temporarily” to July/August 2018 prices, and all U.S. Indices are still very much positive for the year. As a matter of fact, the recovery day of October 16, 2018 was the largest increase in the S&P since March of this year. Investing in the U.S. markets is a business, and one in which we need to keep our emotions in check.
How should I manage my investments during market “ups” and “downs”?
How should I manage my investments during times of market ups and downs? Some investors instinctively want to pull out of the markets or sell underperforming investments as soon as they see “volatility” on the horizon. Diverging from your strategy could mean losing out on potential opportunities, putting your savings at risk. Be patient. Stay focused on your long-term financial goals, like maintaining your standard of living and retiring comfortably. Work with your CERTIFIED FINANCIAL PLANNER™ to ensure that, together, you understand your strategy, you make timely tactical adjustments, and you treat your money like a serious business.
Letting emotions take over could lead you to FINANCIAL JABBERWOCKY!
I would like to thank Nathan Leishman, CFA, for his valuable contribution to this article.
Dimensional Fund Advisors (DFA): produced research showing calendar year returns for Russell 3000 from 1979 to 2017, observing average intra-year decline of 14%, but positive returns in 32 years out of 37 examined.
JP Morgan: S&P 500 intra-year declines of 14% average over last 37 years, with positive calendar year annual returns in 28 out of 37 years.
Crestmont Research: 1.4% median daily S&P 500 volatility (3-month moving average, 1962 to 12/31/2017)
The opinions voiced in this material are for general information only and are not intended to provide specific legal advice or recommendations for any individual. Please consult your legal advisor regarding your specific situation.
This is a hypothetical situation based on real life examples. Names and circumstances have been changed. Investing involves risk including loss of principal.
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Allen Ostrofe, MBA, CFP®, is president emeritus of Ostrofe Financial Consultants, Inc., with clients in 31 states and is a registered Representative with, and Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Ostrofe Financial Consultants, Inc., a Registered Investment Advisor and separate entity from LPL Financial. For questions or suggestions, visit ostrofefinancial.com. Branch address: 565 Brunswick Road, Ste. 15, Grass Valley.