Volatility: a word that strikes fear in the hearts of many retirees, and sometimes even in those who are many years away from retirement. Statistically speaking, volatility is usually measured by how much a stock’s price has differed from its average over time, which can be positive or negative. However, to most, volatility “feels” like a negative: e.g. it only works against us.
Consider this: a 67-year old today was just 30 years old in 1980 and likely had just planted the seeds of his or her future investment portfolio. With the S&P 500 index at about 100 back then, positive “volatility” has moved this index to just over 2,400 today…five bear markets later. Intellectually, we know volatility goes both ways. We know that markets have ultimately gone up over time, but in the absolute, that doesn’t nearly make us feel as good as the panic we feel when markets go down.
Recalling how you felt at a given moment of panic, placed into a bigger perspective or longer-term view, can often help potential irrational decisions become more rational. History is a wonderful guide…frankly, it’s the only one we have. Sometimes we have to look backward in order to help us move forward. So the three reasons to sell all your stocks could be found if you look back only one year. First, remember how you may have felt about the markets one year ago. Here is a short review to help jog your memory:
In January of 2016, I’m sure you’ll remember the headline: “The Worst First Six Weeks in Stock Market History Since Moses.” (I’m trying to evoke the “apocalyptic spin” often used by financial journalists). Indeed, the market did drop over 11% through February 11. Not coincidentally, crude oil recorded its panic low of $26/barrel on that same date.
The price of oil turned, and the “sandstorm” blew itself out. By the spring, the equity markets had more than wiped out this first market “catastrophe” of 2016.
Next came Brexit. In what sort of turned out to be a “dry run” of the U.S. Presidential election, mainstream media decreed that Britain leaving the European Union would lead to a global economic collapse on par with the Great Flood.
In just two days’ time, the S&P 500 dropped close to 6%. (If you’re keeping score, a 6% drop in two days is more volatile than an 11% drop over 6 weeks.) You know the rest of the story…the market turned and wiped out the loss and was at all-time highs in a couple of weeks.
Finally, as nearly as I can remember - it was way past my bedtime - sometime after 2:00 a.m. on November 9th, as it became increasingly clear that Donald Trump would be our next president, there was a moment when the Dow Jones futures were down 800 points! (Printed words can’t possibly recapture the hysteria). It was a 4% drop in just a few hours.
Can you imagine if this occurred when markets were open? Instead, the market actually closed “up” the next day. And by the end of the year, the market had made a significant rally. All of the “sandstorms” of 2016 were but a distant memory.
Fear is clearly a powerful emotion, and like opening a window during a fire, the cable news networks took that fear and stoked it. Had you been scared to the point that you sold all your stocks for any of these three reasons last year - and did not jump right back in, you likely lost a lot.
My 20 years of experience tells me that it is not uncommon for a perfectly rational human being to have an “out-of-body experience” of panic during an episode when the Dow Jones average drops 500 points in a day. That same person, possibly after sleeping at a Holiday Inn that next evening, becomes a rational optimist when the market comes roaring back by 500 points to its previous level. Remember this: it may just help you make better decisions when volatility rears its ugly head again.
Soon, if history is our guide again, new “sandstorms” will reappear; but they will have different names…interest rates, China, ISIS, etc. But for now, all is quiet with strong job markets, no large interest rate moves, and volatility that is non-existent in equity markets. If only one lesson emerges from the “volatile” year of 2016, let it be your understanding that similar episodes of sudden “mass panic” will always be blowing up out of nowhere. And as in 2016, they are most often not to be reacted to, but rather, ignored.
Past performance is not a predictor of future results. Data courtesy of Nick Murray Interactive.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All indices are unmanaged and may not be invested into directly.
Stock investing involves risk including loss of principal.