by Sharon Pryse
The current volatility of the stock market has many people alarmed, especially after 2008. However, when you take a moment to reflect on how the market has changed over the past several decades, you’ll find some consistency.
But, as we have always said, money you need in the next three years or so doesn’t belong in the stock market.
Markets have always been volatile
With daily and weekly volatility in the S&P 500 slightly higher than ever before, it’s not a surprise that many people are wondering what they should be doing financially.
But when you take into account that the annual volatility this year is the lowest it has been, you’ll notice the recent ups and downs aren’t that unusual.
In fact, the past five years post March 2009 have been the least volatile in decades. From 1980 thru 2015 (36 years), the market has been positive 27 of those years despite intra-year drops that averaged 14.2 percent, according to JPMorgan.
Is more information 24/7 really better?
News sources today sometimes highlight the most-negative headlines in order to gain more viewers. Unfortunately, as a society, we do pay more attention to the negative and drama-saturated topics than the positive ones.
And as individuals, we remember the pain of market declines more than the elation of market upticks. It’s no wonder our perception of volatility and negative returns can be skewed. Chasing the market or not sticking with a plan does not work for the average investor.
Based on a Dalbar report, for the 20 years ending 2014, the average investor had an annual return of 2.5 percent. But a portfolio with a mix of 60 percent stocks (S&P 500) and 40 percent bonds, annually rebalanced, had a return of 8.7 percent. Be critical of information sources and wary of unnecessary drama.
Stick to your plan
While the stock market will experience changes, you should still stick to your original financial and investment plans.
First, make sure that you have a plan in place. If you do not, get one. Look for financial planners and professionals who can help establish a plan that will suit your needs. Once you have a plan in place, stay the course.
Your plan should be based on long-term, tried and true principles such as diversification, proper asset allocation and rebalancing. Then, periodically, be sure to revisit your plan to assess and revise as needed.
Part of you plan should include your cash reserve. Hopefully that cash reserve will help you weather the Maalox moments that are inevitable with equity investing. “Risk not thy whole wad” is a great quote to remember.