Volatility Is To Be Expected

Volatility Is To Be Expected

by Mary Suplee on Dec 11, 2018

Over the last several years, we've gotten used to periods of relative calm in the markets. Stock volatility has been near historic lows and up until this year, the fixed income market was behaving relatively benignly. From September 30 through December 10, the US market (as measured by the Russell 3000 index) fell 9.9%. The typical response to this is wondering what will happen next and whether I should think about making changes to my portfolio. The answer the first part is no one knows. The hardest part of a successful long-term investment program is to understand that volatility is a normal part of markets. The second part is not to make dramatic changes to your portfolio in reaction to market volatility.

Portfolio changes are made relative to life changes. Changes in income, spending, health or timeframe all might be reasons to make portfolio changes but a little market volatility is generally not. Over the long-term, reacting emotionally to volatile markets has often been more damaging to peoples’ portfolios than the actual selloff itself.  It's funny how the stock market is one of the few places in life that we consistently observe the phenomenon of people selling when things are down and buying when they are up.

The following chart shows the yearly returns of the US stock market since 1979. It also shows the largest intra-year gains and declines during the years. One thing that's consistent is that there's a lot of volatility in markets. Just eyeballing this, it looks like more than half the years had declines at some point of greater than 10%. The average decline is 13.8% and it looks like about 1/3 of them are greater than 15%. It's very interesting that even with these ranges of yearly declines, over 80% of the years ended in the positive. Market declines are very common and it is very difficult to say if they result in a negative return for the year. What should be obvious is that over the long term, market returns are overwhelmingly positive.

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