Stock markets globally experienced a jolt of volatility as July turned to August in recent weeks. But one thing investors need to understand is we were spoiled with unusually steady market conditions for over a year. On August 10th, the Wall Street Journal pointed out that leading up to August, the S&P500 had gone 356 trading days without a 2% (or greater) decline. According to Dow Jones Market Data, this was the longest such stretch since 2007. Thus, in an ironic twist, what’s really been abnormal is how calm the markets have been.
Investors cannot be reminded enough that volatility is the norm when it comes to owning stocks. JP Morgan regularly updates a chart dating back to 1980 which tracks market swings within every calendar year. Amazingly, the research shows that on average, every year, the market has declined from peak to trough by 14.2% at some point. But despite these wide gyrations, annual returns were positive in 33 of the last 44 years (all data based on the S&P500).
Now, it’s easy to get lost in all these figures and investment jargon. Another way to put the previous paragraph is to say it’s reasonable to expect the stock market will experience a periodic decline in excess of 10% at some point every single year.
This doesn’t mean you have to like it! No one enjoys seeing their net worth decline. But in the stock market, it cannot be over-emphasized that significant swings are part of the game.
I’m always reminded of a quote from Peter Lynch, who many consider the greatest mutual fund manager in history. From 1977 to 1990, his fund averaged 29.2% annual returns. But, like the over-all market, it wasn’t a straight up trajectory. Lynch once quipped, “When I ran Magellan Fund, the market had nine declines of 10 percent or more…All nine times, my fund went down.”
The point is, no one can side-step market volatility. But the good news is you don’t have to get a good result. In-fact what’s stunning is if you look to where the S&P500 began the year 1980. It started that decade at a level of 108. As I write this today, it sits at 5,344. That represents a 50-fold appreciation not including dividends.
So, as the recent market tumult makes headlines, remember, this is completely normal. The stock market has always been volatile and always will. As I often tell clients, one of the key objectives of a retirement plan is implementing a strategy that minimizes or even eliminates the impact of market swings on one’s monthly cash flow. When you accept that ups and downs are just part of the game and have an approach to manage them, you’ll be in a much better position to sit back and enjoy the journey.
Disclaimer
Norris Lake Financial Planning is a SEC registered investment advisor able to conduct advisory business in states where it is registered, exempt or excluded from registration. All contents contained herein should not be construed as an offer or solicitation for investment advice or for the offer or sale of any security, insurance or other investment product. Data contained here is obtained from believed reliable sources, however, cannot be guaranteed. Investments contain a risk of loss. Please consult a qualified legal, tax or accounting professional before implementing any investment or strategy discussed.