Boltwood Capital Management | Market Volatility Stressing You Out? Change Your Perspective.
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Market Volatility Stressing You Out? Change Your Perspective.

The stock market has continued to feel like a roller coaster ride so far in December. After gaining 4.9% the previous week, the S&P 500 declined 4.6% last week, including single day losses of 3.2% and 2.3%.

Even for investors with strong stomachs, these ups and downs can be unnerving. If you’re among those feeling more stressed lately, it may help to change your perspective. Specifically, try to look past the daily volatility and focus on the longer-term.

As the saying goes, a picture – or in this case a chart – is worth a thousand words. The chart below shows the daily price movements for the S&P 500 for the past twenty-plus years – from 1/1/1998 through 12/7/2018. Highlighted on the chart are the twenty best (green) and twenty worst (red) single day returns during the period.

A couple of observations:

  • The best and worst single day returns frequently occur close together. Those investors that panic and sell during market declines run the risk of missing out on a quick rebound in prices as well as longer-term appreciation. For example, on February 8th of this year the S&P 500 declined 3.7%. Over the next eleven trading days the index rose a total of 7.8%, including six single-day returns of greater than 1%.

 

  • Significant negative daily moves can occur during an overall rising market. In 2009, the S&P 500 had twelve trading days with declines of more than 3%, including a single day where the index lost more than 5%. However, for the year the S&P 500 was up more than 25% (including dividends). In fact, the S&P 500 has had a positive return (again, including dividends) in 16 out of the past 20 years.

 

  • Although unpleasant, this most recent bout of volatility isn’t really unusual. In fact, the 3.24% drop on December 4th doesn’t even make it into the worst fifty single-day returns in the 20-year period for the S&P 500.

We strongly advise that investors have a long-term plan that includes a target investment allocation that is appropriate for both their goals and personality. Having a plan helps to avoid the temptation to make ill-advised changes based on short-term volatility. If you are having trouble sticking to a plan during periods like last couple of months, you may be invested too aggressively for your personality or simply need refocus on the long-term.

Remember that those who have had the fortitude to stay invested long-term have been rewarded. Over the 20-plus year period shown in the chart, despite including both the dot-com bust and financial crisis, the S&P 500 has returned more than 300%.