6 Ways to Keep Market Volatility in Perspective
As Ron Burgundy once, said: “That escalated quickly.”
The Standard and Poor’s (S&P) 500 stock index is down over 13% year-to-date (as of 8/5/22), and the index was much lower earlier this year. Volatility in stock prices seems to be here to stay, with technology making it much easier to trade and analyze stocks.
Your decisions about investing can be difficult. After all, the results of your decisions have a huge impact on your financial future. Investing is even more challenging during volatile markets. You have money at risk- and watching volatility just increases that anxiety. Consider these tips to keep market swings in perspective.
Contents
#1- Ben Franklin’s advice: More information can help
Moneycrashers provides some great quotes from Ben Franklin regarding money and finance. Here’s a quote that I think is insightful:
“An investment in knowledge always pays the best interest.”
Learn the “why” behind market volatility. That’s the purpose of this blog post. I don’t know about you, but getting more information about any issue always reduces my anxiety. Franklin was a lifetime learner- we all should be.
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#2- Do you know yourself?
How much risk are you comfortable taking- I mean really comfortable with?
Wealthfront is an investing company that caters to millennials. This group is defined as people born between in early 80s and early 2000s (which includes all three of my kids). They tend to want low cost, passive investing with less help from more expensive financial advisors. All good.
To find out about an investor’s suitability, a new account owner is asked a series of questions about investment goals, experience and risk tolerance. Let’s assume you’re answering the risk tolerance question. Think about your answer this way:
If your portfolio’s value went up or down 20% in one year, is that something you could live with? If not, how about 10% up or down? You start to get the idea.
In August of 2015, as an example, we had market swings in the S&P 500 of 2-3% per day. Similar volatility has followed over the years. How much anxiety is that causing for you? If your answer is “a whole lot”, you need to shift some of your assets out of equities- or at least out of more volatile equities.
#3- Volatility is a matter of degree
A 2-3% daily swing in the S&P 500 does get your attention, but let’s keep it in perspective. I was an investment rep in 1987- only a few years out of college. My car was in the shop on Oct. 19th , so I caught a ride home with my co-worker, Scott.
Bloomberg explains that the market lost a third of its value in the 5 trading sessions from Oct 13th to 19th. On Black Monday the 19th, the market declined 22.6%- in one day.
Certainly, volatility differs, depending on the types of investments you purchase.
#4- Experience of past declines
Ric Edelman, chairman and CEO of Edelman Financial Services pointed out that, from 2000 to 2015, we saw two abrupt market declines: The tech bubble of the early 2000s, and the ’08-’09 mortgage crisis…”only to see the market nearly triple from its lowest point.”
Financial Planning makes another great point:
Between 1900 (and 2015), there have been 35 declines of 10% or more in the S&P 500… “Of those 35 ‘corrections,’ the index fully recovered its value after an average of about 10 months.”
Use your experience in past declines to take a long view about the market’s performance.
#5- Technology is speeding up trading- and probably volatility
In 2015, Washington Post wrote that advances in technology allow larger stock trades to be placed and filled quickly. As technology improves, so does the speed of trading. This is particularly true at hedge funds and other firms that trade large positions with cutting edge technology. Want to buys stocks using your phone? Robinhood can do that for you.
We all may have to accept more volatility as tech continues to improve.
#6- Remember historic rates of return- over the long term
What is a sustainable rate of return on a stock portfolio? Well, let’s use the Standard and Poor’s (S&P) 500 index as an example. This is an index of the 500 largest stocks, in terms of capitalization. The average annual rate of return from 1928 to 2014 is about 10%. If you’re investing over the long-term, 10% is probably a sustainable (expected) rate of return.
There’s an old quote: “timing the market is not as important as time in the market”. Consider you investing timeline (10 years, 15, 20). Once you decide on a timeline and invest, consider a reasonable return over the timeframe.
Sure, there will be volatility along the way, but leaving your funds invested until the end of your timeframe has proven to be successful over the long term.
Use all of these tips to keep volatility in perspective. You can grow your portfolio, handle market swings- and reach your financial goals. Consult with a financial advisor regarding investment decisions, risk tolerance, and other financial issues.
Ken Boyd
Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies
(email) ken@stltest.net
(website and blog) https://www.accountingaccidentally.com/
(you tube channel) kenboydstl
Image:
Wall Street Two Signs
Terrapin Flyer, Wall Street (CC BY-SA 2.0)