When we think of financial health, a few things might come to mind. We may think of our own financial status, our investments, the Dow Jones Industrial Average...
Much ink is spilled each day in the media about the "volatile" stock market. Even with the S&P 500 up 10% year to date and an incredible 44% in the past year, the media continues to look for the bad news in a sea of good.
What Does "Volatility" Mean?
Merriam-Webster defines volatility as "a tendency to change quickly and unpredictably" or "a tendency to erupt in violence or anger". Volatility is often perceived negatively due to its suddenness.
Usually people look at volatility relative to some perceived "normal" level. In the case of stocks, people often consider the historical or expected future return of stocks in judging volatility.
The stock market (for our purposes we'll consider the stock market to mean the 500 largest US companies) has a long-term historical return of 10% annually. This is the normal return around which many investors will measure volatility. Interestingly, this 10% return has been remarkably consistent over long periods of time.
Are Stocks Volatile? Absolutely.
If by volatile we mean the prices go up and down every minute of every trading day then, yes, stocks are volatile.
Even over longer horizons, stocks are volatile. We know from history that:
- The average annual intra-year decline (i.e. how far stocks fall ay any point in a given year, even when the market finishes up for the year) is 14%. Said differently, even in a good year where stocks finished up, investors still experienced a downturn at some point during the year.
- Stocks finish the year down, on average, about once every five years. In those years where the market is down, the average decline is more than 30%.
No question, stocks are volatile.
Should Investors Worry About Volatility?
Yes, but how much so depends upon your time horizon. Since 1926, with dividends reinvested, the market has generated positive returns:
- 77% of the time for 1-year holding periods
- 91% of the time for 5-year holding periods
- 97% of the time for 10-year holding periods
- 100% of the time for 15-year holding periods
Clearly, with enough time to ride out the volatility, stocks deliver positive results with incredible consistency.
Your Portfolio Must Deal With Volatility
There is no free lunch; if you want the 10% returns of stocks you have to accept the volatility that comes with them. Patient investors know that the declines are temporary, while the returns are permanent.
Retirees have very long time horizons. If they start early enough, they can invest over 30-40 year accumulation periods in order to grow their wealth. Given advances in medical technology, those same savers may experience another 30-40 years of retirement. That's a 60-80 year investment lifetime for some people.
If you know the long-term facts, the market can be your best friend. If you find yourself reacting to short-term volatility, the market can wreck your retirement.
You Need A Plan
At Oxford Financial Partners we're fond of saying that "portfolios are built in anticipation of volatility, not in reaction to it." We know the volatility will be there, and we know that investors are all human. They seek to avoid pain whenever they can. Our work with retirees recognizes those realities.
That's why we design our portfolios with a "Stability Bucket". Our Stability Bucket is a disciplined approach to taking the emotion out of retirement investing. We determine your withdrawal needs for the next five years and immediately set those aside in a low-volatility Stability Bucket. Any remaining assets are invested for longer-term appreciation in a diversified “Growth Bucket.” In a bear market, the money in your Stability Bucket will help you ignore the temptation to sell growth investments at fire-sale prices. This leaves most of your portfolio fully invested, thereby capturing the long-term positive returns of stocks.
Our proprietary Power of 5 Investing® system recognizes volatility and capitalizes on it. Our approach has been battle-tested in 25 years of volatile markets and has enabled more than 150 families to enjoy a comfortable retirement, with most on track to leave behind a meaningful legacy to family and charities.
We're Here to Help
If you or someone you know wants to know how to conquer stock market volatility, click here to schedule a meeting. We're happy to help.