When we experience short term market volatility, you won’t have to look very far to find plenty of apocalyptic headlines. If you can’t resist reading the stories attached to them, you’ll likely find ample predictions to feed your worst fears. Instead, remember this: Fear is not a useful element in long-term investing strategies.
Discipline + Patience > Fear + Worry
Discipline and patience are the most meaningful elements for prudent investors. Fear and worry aren’t a foundation for long term-success.
But this time it’s different!
Every market decline seems to be accompanied by this recurring theme. It’s like the movie Groundhog’s day where the main character wakes up and keeps repeating the same thing over and over. You could easily find other market-related scary headlines and fear-inducing stories in January of this year or May of last year. Don’t bother looking for them, they won’t actually enhance your investment experience or your long-term investment outcomes.
Informed investors who acknowledge the history of volatile markets understand that it’s ALWAYS different. The future is random and unknowable. The fact that we’ll have to endure scores or perhaps hundreds of “this time it’s different” scenarios over our investing lifetime is why we have an expectation that disciplined investing rewards the persistent investor.
Volatile Short-Term Markets Are Precisely Why We Reasonably Expect Long-Term Returns
Some historical S&P 500 Index facts that accompany the chart above:1
- Markets tend to go up more than they go down, even after dramatic downturns
- Average intra-year pull back for S&P 500 since 1980 is 13.8%
- The annualized rate of return (with dividends reinvested) for the entire period: 9.92%2
Volatile market periods like these are great reminders to return to the core principles of discipline. Here are three worth remembering and repeating:
Avoid the Noise: The Financial Media’s job is to entertain you with controversy [fear, greed and speculation] so they can sell advertising. The truth is, nobody knows what will happen next. If they did, they wouldn’t be on TV [or writing articles]. But if they can keep your interest with thinly-veiled guessing about what’s next, you’ll see lots of ads for so-called “superior” mutual fund managers, shiny luxury cars and certain pharmaceutical products.
Panic Pays No Premium: It’s not always easy or fun along the way, but maintaining your long-term investment strategy during times of short-term uncertainty allows the investment program to work for you. We’re actually relying on uncertainty and volatility to fuel the engine that beats inflation over meaningful time periods. Don’t let emotion take over! It can have you buying and selling at exactly the wrong time.
Marathons Are Not 26.2 x 1-mile Sprints: Long-term investing historically includes scores, if not hundreds of 1-day events that temporarily jolt markets in different directions. You should be following a strategy that does not require you be “correct” about short-term price movements in order to pursue market returns reliably. The disciplined investor following this path is more likely to be rewarded for maintaining long-term dedication to their strategy despite short-term volatility.
So, what should you do? Bolster your resolve to maintain long-term discipline and diversification rather than changing your current investment strategy.
- Chart end date is 12/31/2019, the last trough to peak return of 451% represents the return through December 2019.Bear markets are defined as downturns of 20% of greater from new index highs. Bull markets are subsequent rises following the bear market trough through the next new market high. The chart shows bear markets and bull markets, the number of months they lasted and the associated cumulative performance for each market period. Results for different time periods could differ from the results shown.
The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this commentary is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. Indices are unmanaged and their returns assume reinvestment of dividends and do not reflect any fees or expenses. It is not possible to invest directly in an index. Information obtained from third party sources are believed to be reliable but not guaranteed. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.