Sleepless from stock market volatility
Did the recent market volatility get you in a panic?
Do you have the sense that markets fluctuate more now than ever before?
Although it seems like markets are showing more whipsaw action in the past year or so, that’s not entirely true.
If you feel uncertain about the stability of your investments, that may be due to uncertainty and anxiety about the political situation here in the U.S. and abroad.
So what is volatility, exactly, beyond just a feeling that markets are unstable? In simple terms, volatility is the rate at which a security’s price moves, either up or down, for a particular set of returns. It’s useful to parse the volatility metrics over specific periods of time to understand how markets really performed.
One truism about financial markets: On a short-term basis, not only do they seem more volatile, but they actually are. The daily volatility of the Standard & Poor’s 500 index of big U.S. stocks has been about the same for the past 18 years. I realize that period of time includes the 2007 through 2009 market debacle. It also includes the prolonged uptrend that began a decade ago, in March 2009.
If we step back and look at the volatility on a monthly basis, the period of time from 2010 through 2018 was slightly more volatile than the prior 10 years. This probably contributes to the sense that markets are riskier than ever.
However, things get really interesting when we look at the annual volatility. Between 2010 and 2018, markets were less volatile than the decade between 2000 and 2009.
Over time, volatility does smooth out. It’s not easy to sit through a sharp downturn, especially when the financial websites and TV channels are inciting panic about the day’s action.
Even when stocks decline sharply on one day, they often rebound the following day, and the financial analysts in the chattering classes go back to business as usual. That’s until the next big day of steep downside trading, of course.
Here’s a recent example. The S&P 500 dropped 1.9 percent in heavy trading volume on Friday, March 22. For the week, the index declined only 0.77 percent, as Thursday’s session ended with a gain of more than 1 percent. As of Wednesday of the following week, it was up 0.2 percent, at levels higher than where it ended the prior week.
Could that change in a heartbeat? Of course. That’s where focusing on the long term is the best course, although it’s not easy.
The real question lurking behind concern about volatility is: “Are my investments at risk because the market will drop suddenly?”
To unpack that, let’s look at the fourth-quarter bout of volatility that began in October 2018. Stocks took a tumble that erased the year’s price gains for many investors. But so far this year, stocks have clawed their way back.
The S&P 500 declined 13.9 percent in the fourth quarter. This year, it’s rallied back 12.4 percent. That is not enough to make up all the lost ground, but the index is back at its mid-October levels.
So where does it leave you? As humans, our brains are wired to focus on short-term dangers. That’s a much more compelling reason to take action (such as fight, flight or freeze) than to position ourselves for something in the distant future.
That’s why retirement saving is difficult. You need the car repaired today. That’s an emergency. Retirement in 15 or 20 years? That’s too far out in the future to even comprehend. There’s zero urgency.
The same principle applies to viewing your accounts on a day-to-day basis vs. the long haul. In the short term, whipsaw action in the markets is unnerving, particularly when it results in a drop in value. However, historically, markets have risen over time. In addition, there are ways to properly invest and balance risk to generate the return a retiree needs; in this day and age, there is no need to “wing it” and hope for the best.
Kate Stalter, founder of independent asset management firm Better Money Decisions, helps people throughout Northern New Mexico invest for retirement. For a free report, “5 Serious Mistakes To Avoid In Retirement,” email WeCanHelp@ BetterMoneyDecisions.com or call 844-507-0961 ext. 702.