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The "Gift" of Market Volatility Thumbnail

The "Gift" of Market Volatility

Bad news isn't always a bad thing

Have you ever noticed, some of your luckiest breaks come from events that initially seem like bad news? An illustration struck close to home for FVIM advisor Matt Ebeling when he and his wife attended an October event hosted by Decoding Dyslexia. After their daughter was diagnosed with dyslexia this summer, they wanted to learn more. "The speaker was amazing," says Matt. "He pointed to so many successful people with dyslexia, even Albert Einstein! We learned dyslexia isn't something you can cure, like some blemish. It's to be accepted as a gift for thinking outside of the box."

Similarly, you may fear or resent market volatility and negative market returns when they arise. You may be tempted to try to "cure" it by changing your portfolio.

That would be an unfortunate response to the gift of market volatility. Because, yes, it can be a gift. Near-term market declines are not only far more common than most people realize, they're essential to the long-term returns you invest toward to begin with. As decades of academic inquiry suggest: No risks, no expected rewards.

So what do you do?

When negative returns do pop up in your monthly, quarterly or even annual statements, what should you do? That's kind of a trick question – especially if you're invested according to a personalized plan and you've set aside enough liquid reserves for upcoming spending needs. If that's the case, the most likely action is to do nothing.

As we have reminded investors over the years (here , here and here), having a well-thought-out retirement plan tailored to your time horizon, needs and goals is a good start. Sticking with your plan during times of uncertainty is equally essential.

Let's be honest. Last month, investing according to plan got a little more difficult. When the Dow Jones Industrial Average dropped more than 800 points on October 10, and other indexes fell more than 10% over a few weeks, it caught everyone's attention, setting social media and the popular press a-buzzing.

Unfortunately, when you're smack in the middle of a market drawdown, you cannot know if it's a non-starter or a harbinger of worse to come. That's what makes the volatility scary, especially if it lingers.

To put current events in context, it helps to revisit the long haul. It informs us, while we cannot predict the immediate future, odds are in our favor that a disciplined investment outcome will ultimately be rewarded. For example:

  1. Would you be surprised to learn that the average October return for the S&P 500 from 1950 through 2017 has been modestly positive, at +0.78%? That's just a monthly return, mind you. If you annualized that figure, it'd be a healthy 9.36%.
  2. Of course, there have been stinker months too, in October and year-round. Thus our advice to diversify your portfolio globally to avoid betting too heavily on any one market.
  3. This blogger satisfied the numbers geek in us by pointing out, "Roughly 60% of the time a 10% correction didn't lead to a bear market while roughly 40% of the time it did."
  4. Circling back to our "gift versus blemish" premise, even those times when the market did endure a serious and extended downturn, it can be viewed as a benefit to long-term investors. Again, without occasional significant risks, we'd have to expect lower future returns. 

Keep calm and carry on

We understand, even when you're fortified by facts, it can still be unnerving to see negative returns in your portfolio. When scary market news is on the rise, evidence-based resolve can still be lost in eons of ingrained instincts. In his recent report, "The High Financial Price of Our Short Attention Spans," UCLA's behavioral economist Shlomo Benartzi reflects, "[T]he complexity of financial decisions benefits from a reflective thought process, so that we can marshal all our cognitive resources on navigating the necessary trade-offs. … Your biggest mistakes will come from overreacting to the latest stock swings, not underreacting."

If you ask us, that's a fancy way of saying, you're best off appreciating the gift of market volatility as intended. Don't try to fix it like it's a blemish; rather, accept it for what it is.