Over the last few business days, the stock market has fallen almost 1,800 points only to rebound. To most, these events appear to be a drastic change—especially when fluctuations beyond 300 points on a single day have been rare. Viewed only through this lens, recent market volatility could be unnerving.
Viewed through a historical lens, current volatility isn’t all that unusual. If we were financial bloggers, we could get a whole click-baity article from the following quote (our title would be: The One Secret Every Good Investor Knows to Avoid Terrible Catastrophe!):
“Drops in the market are eminently predictable – not in their timing, but in their magnitude and suddenness. And it is in these periods of anxiety – when the market has been most severely negative -– that clients and managers predictably engage in ad hoc “reappraisals” of long term investment judgment, which allows short-term fears to overwhelm the calm rationality of long-term investment policy.” (quote from the book “Winning the Loser’s Game”)
Simply restated, most people know that the stock market is always going to give us a few bumps along the road, yet still the past few days have been jarring. One of the quirky things about being human is that adversity seems to rattle us harder when it comes during a period of relative tranquility. Now is the time to give yourself a reality check.
If you own stocks, you must accept more uncertainty and volatility for those holdings.
When it comes to things like your money and your health, it’s difficult to stay calm in the face of uncertainty. But when you invest in stocks, you are accepting uncertainty, especially in the short term. So when the going gets tough, try to think of retirement as a destination. And if you’re investing in stocks, it’s helpful to think of the stock market as a vehicle that you are intending to ride for quite a long time. The very idea of investing in stocks is to expect a higher return in the long term as a reward for your willingness to accept a bumpier ride in the short term.
Of course, hopefully this is just turbulence.
If you think about it, the stock market has a lot in common with our fastest-moving form of physical travel: commercial air travel. Just like a long trip on a jumbo jet, riding the stock market is rarely comfortable, but it’s the most efficient way to travel!
The past few years have been incredibly smooth flying. The past 20 months have delivered a record-low level of volatility for global stock markets, and the US markets have risen every year since 2008. It’s no wonder we have become so comfortable when we’ve essentially been cruising in first class, sipping Mai Tais for nine years running!
Nonetheless, this should remind us that stocks aren’t always going to deliver warm and fuzzies. Investors need be mentally and structurally ready for down-turns. Structurally, that means we shouldn’t be putting money into stocks that we are planning to spend any time soon. If retirement is near, we should have a considerable amount of money in short-term assets, such as cash and bonds, to cover those spending needs. Mental preparedness means ensuring we are invested in a portfolio with risk characteristics that we can handle emotionally in the bad times. If we limit risk to an amount we find acceptable, we will likely avoid making a big mistake, such as exiting the plane at the wrong time!
The right answer is to plan your course and stick to it.
There is no way to predict what the stock market will do in the short term, and we certainly don’t intend to make such a prediction. However, regardless of what comes in the months ahead, it seems an opportune time to caution you against reactionary investment decisions. If you know you are investing prudently given your risk appetite and timeline to retirement, then this is but a reminder that there will be bumps along the road. The key is to remain disciplined in your investment approach and focused on long-term results. However, if you aren’t invested appropriately, then this might serve as a reminder to assess your portfolio and make changes, if appropriate.