“Volatility is up,” said the headlines most of last week. Really? With a new week upon us, and the market seeming to be roaring back, let’s see if we can shed some light here.
We start by acknowledging that these gyrations can be unsettling. Pick your reasons—a stubbornly sluggish economic recovery in the U.S., renewed uncertainty in the Euro-zone and China, ISIS, even Ebola—any number of things can cause volatility. And the volatility is real: since the end of September, the S&P 500 index has done something that usually occurs infrequently: it has moved more than a full percent up or down in a single day. Consider these market movements:
Oct. 1 -1.3%
Oct. 5 +1.1%
Oct. 7 -1.5%
Oct. 8 +1.8%
Oct. 9 -2.1%
Oct. 13 -1.65%
Contrast this to the calm before the storm: earlier this year, the markets experienced 42 consecutive days without a single 1% price move. Yes…Volatility is up. OK, so what does it mean for investors? A more pertinent question we should ask ourselves is this: why are we paying such close attention to daily market movements? Why do we allow ourselves to become anxious over short-term swings in stock prices?
Professional investors know something that most people find difficult to believe: that the scary ups and downs in the markets are really just noise to the long-term investor. Why? Because over the long term, stocks have provided returns far higher than bonds or cash.
If you click on the following link, you will see a chart which shows the growth of a dollar invested in the S&P 500 at the beginning of 1950, with dividends reinvested, compared with a variety of other investments which have not provided the same returns:
Small cap stocks, which are more volatile, have done even better than the large caps represented by the S&P 500. The chart also shows some of the headlines that the markets managed to sail through on the way to their current levels. Scroll down further and you will also see the cost of trying to get in and out of the markets: missing just several of the best growth days can severely inhibit your returns.
We like to say that if your asset allocation made sense in the days before the market gyrations, they still make sense during…and also when the markets settle down.
This is not to say that the markets won’t go lower in the coming days, weeks or months; in fact, we are still awaiting what we expect to be that correction of at least 10% which we have seen markets deliver on their way to new highs, and which we view as long-delayed in this current bull market. The thing to remember is that the daily price of your stock holdings are determined by the mood swings of skittish investors whose fears are stoked by pundits and commentators. They know that the best way to get and hold your attention is to scare you. What they don’t say, because it’s boring, and doesn’t make headlines, is that the value of your stock holdings is determined by the effectiveness of millions of workers who go to work every day in offices and factories, farms, warehouses, power plants and research facilities--who slowly and incrementally build up the value of the businesses for which they work.
The last time we checked, that incremental progress hasn’t stopped. Yes, it ebbs and flows. But if you take a calculated look at the growth of an investment in stocks over the long-term, you get a better idea of how that value is built over time, no matter what the markets will do today or tomorrow.
Neil Goldberg is a principal with GW & Wade. The information provided above is general in nature and is not intended to represent specific investment or professional advice. No client or prospective client should assume that the above information serves as the receipt of, or a substitute for, personalized individual advice from GW & Wade, LLC, which can only be provided through a formal advisory relationship.
Chart presents hypothetical value of $1 invested at the beginning of 1950 and assumes reinvestment of income and no transaction costs or taxes. Chart is provided for illustrative purposes only and is not indicative of any investment. An investment cannot be made directly in an index. Past performance is no guarantee of future results.
GW & Wade is an SEC-registered investment adviser and is not affiliated with J.P. Morgan Funds. Please see the “Contact Us” section of our website, www.gwwade.com, for information on contacting GW & Wade.
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