A word about volatility. We’ve been writing about this topic periodically for nearly 25 years. Let’s put that in perspective: the DJIA was at 3,800 25 years ago; we endured the Asian market meltdown; the run up and blow up of tech stocks; the Great Recession; the Greek default; Brexit; the 2016 elections; etc. Today the DJIA stands at around 24,000 . Yet investors get quite frightened from time to time due largely to market volatility. Short term volatility often stems from the headlines of the day but in the long run, indices like the S&P 500 and the DJIA are reflective of the fortunes of the companies that make up those indices.
So here are some things to keep in mind.
- If your investment time horizon is longer than five years, you should probably have some of your money in stocks – the more diversified, the better.
- Short term market volatility is the price you pay to capture the market’s rate of return. Over the long haul, the return is positive and the longer you hold, the greater the likelihood you will do better than you would in a bank account.
- Pay no attention to the day to day fluctuations of the market (provided you are diversified) or the financial media and focus on prudent planning to maximize your returns and your happiness as you live your life and move closer to your goals.
Some context: the US stock market as measured by the S&P 500 index has a peak to trough drop (recent high to a recent low) of about 9%-10% on average annually. In 2018 (through December 13th), that peak to trough drop has topped out so far at 10.10% . Thus far this year has been…average in terms of volatility. Volatility is the stock market’s natural state; we’ve actually had relatively little volatility over the last several years. Pay no attention to how many points the DJIA or the S&P has dropped (or run up) on any given day, week, year. All that matters is percentages. A 500 point move in the Dow when it’s at 5000 is very different than when it’s at 25,000. A volatile market is the market’s natural state.
All indexes have certain limitations. Investors cannot invest directly in an index. Indexes have no fees. Historical performance results for investment indexes generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee, the incurrence of which would have the effect of decreasing historical performance. Actual performance for client accounts may differ materially from the index portfolios. Dow Jones Industrial Average Index represents a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. S&P 500 Index represents the 500 leading U.S. companies, approximately 80% of the total U.S. market capitalization. © Morningstar 2018. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied, adapted or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information, except where such damages or losses cannot be limited or excluded by law in your jurisdiction. Past financial performance is no guarantee of future results.