“Planning” for Market Volatility
The first six months of 2024 featured strong stock market returns with relatively subdued volatility. In fact, there was only one instance when the S&P 500 index rose or fell by more than 2% (and in that instance, it went up).
Investors may remember this stretch as pleasantly uneventful, experiencing steady gains in portfolios with no new major crisis in markets.
But then late July and early August happened.
On August 5, U.S. and global stocks experienced single-day volatility that rivaled trading days during the 2008 Global Financial Crisis and the 2020 Covid-19 crash. And at one point, the S&P 500 declined -8% in just 14 trading days.
The sudden onset of volatility is unsettling no matter how long you’ve been an investor. Markets often feel like they become substantially riskier when they experience swings, which can prompt a mindset that investors need to “do something” in response.
What’s critical to understand, though, is that sudden volatility is not necessarily a sign that markets are behaving irrationally or inconsistent with history. In fact, it’s a sign markets are behaving normally.
The chart below may seem a bit noisy at first glance. But what you see are S&P 500 market returns each year since 1980 (the gray bars) and the amount that the market declined within each year (the red numbers). Two observations are important here:
Since 1980, the stock market has delivered a positive annual return 75% of the time.
The average intra-year decline for the S&P 500 is -14.2%, which is a stark reminder that downside volatility is not an anomaly of equity investing—it’s a feature of it.
Source: JP Morgan
When RSMA Wealth Management develops financial and retirement plans for clients, we do so knowing there will be periods of wild market swings—and even longer bear markets—that occur along the way.
Clients with shorter time horizons can limit exposure to volatility with diversified portfolios and reduced stock allocations. Clients with longer time horizons and growth goals should see volatility as the ‘cost of admission’ to realizing stocks’ attractive long-term returns. Remember, all the sharp downturns and crises of the past are averaged into stocks’ long-term returns, which almost always means that investors must endure the ups and downs to achieve equity-like returns.
At the end of the day, long-term equity investing is not about skillfully moving in and out of markets to avoid downside volatility. It’s about committing to a long-term plan of owning stocks for essentially as long as possible to capture returns generated by bull markets. Trying to actively trade around volatility can reduce the likelihood of capturing these rallies, which can lead to outcomes in direct opposition to your financial goals.
The chart below illustrates this point. For the 20-year period from January 1, 2004 to December 29, 2023, the S&P 500 delivered an annualized return of 9.7%—which included the 2008 Global Financial Crisis and the 2020 Covid-19 bear markets. Staying invested in good times and bad generated these results.
But when an investor missed the best days in the market—which almost always occur within two weeks of the worst days—their total return plummets.
Source: JP Morgan
The desire to “do something” after volatile down days could mean foregoing the strong rallies that tend to follow, which can do real damage to an investor’s long-term returns. When confronted with the sudden onset of volatility, sticking to the plan and staying calm is often the best response.
Conclusion
The famed investor Peter Lynch summarized the approach to volatility this way: “Far more money has been lost by investors trying to anticipate [market] corrections than has been lost in all the corrections combined.”
Indeed, the issue that often troubles many investors – and ultimately hurts them – is that they let volatility increase their temptation to “time the market,” allowing short-term uncertainties to drive decision-making that can have serious long-term impact. But it’s important to remember that volatility works both ways, and history shows that volatility works in investors’ favor far more often than it works against it.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly.
Stock investing includes risks, including fluctuating prices and loss of principal.
Investing involves risk including loss of principal. No strategy assures success or protects against loss.
The S&P 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
