When Market Volatility Strikes
Fading market volatility.
It’s almost hard to believe that 18 months ago, we were in the midst of one of the worst, fastest dropping markets in history. The volatility was extreme. Does anyone still remember it? I do. It’ll be hard to forget the anxious phone calls and emails, and trying to get my parents a flight home from Spain before a “border closure”.
The bad news is that Covid-19 is still here. Yet, March 2020 seems like a lifetime ago. In fact, this winter may be rough again, with sky rocketing cases, overflowing hospitals, and unnecessary death. Despite the Delta variant, and whatever variant may be next, the market doesn’t seem to care.
The question we’ve been fielding the most is why does everything keep going up?
That’s a good question.
So, where's the volatility?
18 months isn’t exactly right. It’s actually been 17 months and 15 days since the market lows on March 23, 2020, as of this writing. But ever since the bottom, there has hardly been any market volatility, as illustrated in the chart below.
So far in 2021, the worst drop we’ve seen in U.S. stocks has been 4.96%. That’s remarkable considering the market typically experiences at least one 10% drop during most 12-month periods. It’s even more remarkable compared to what happened in 2020 when the market dropped 35% in 30 days.
The lack of stock market volatility hasn’t changed our perspective from what we wrote in March, 2020. Be disciplined, and stick to the plan.
Today, we’re hitting new highs. And there is a wide variety of reasons why we’re experiencing such smooth sailing. One big factor is the positive earnings results we’re seeing from most companies like Google or Disney. Yes, businesses seem to be doing just fine, even if finding workers is hard.
We will see big time market volatility again. We always do. It’s part of the game, because without risk there is no reward. So, consider this a reminder to not be lulled into taking on more risk than you can afford.
The market is erratic, but you don't have to be.
Let’s pretend the stock market chart above is representative of you walking your dog. It is pretty obvious when that dog saw a squirrel. There are also a few clear spots when that dog found something interesting to sniff. Other than that, that’s one well-trained dog!
Now, the question is whether or not the dog yanked you along to chase the squirrel.
If not, then that “V” is when the dog ran out of leash, meaning you stayed in control.
If yes, then that “V” is when the squirrel ran up a tree finally stopping the chase, meaning you lost control.
Unfortunately, the latter is usually how many investors react to market volatility. They run along with it. Not being the master of your portfolio, and the emotions it creates, is bad for your wealth.
Your goal as an investor is to not react to market volatility.
Our goal is to stick to the investment plan. And that usually means trying to face market volatility with as much composure as possible. That means staying the course when prices go wild.
The market will act (and does act!) like a dog on a leash, darting this way and that, chasing everything that grabs its attention. But our job as a good investor is to be the master, not get distracted, and walk the intended path toward our goals.
Let the dog run around. That’s what a walk is for anyway. When you know your path and stick to it, you and the dog will have a successful walk.
Investing is the same. Our portfolio is the centerpiece of our net worth and its growth engine over time. But it’s invested in the market and, in the short-term, will follow an erratic path. As long as you don’t let it jerk you around, you’ll get to where you want your wealth to go.
Be ready, but stay steady.
It feels odd that the market has posted such incredible returns in 2021. But it’s not necessarily uncommon. The market can do surprising things. Just don’t let the good times lull you into complacency.
A pandemic is still raging after all.
Since we haven’t experienced negative volatility much this year, it remains as important as ever to be aware that the market is like a dog. One moment it’s walking right next to you, perfectly fine, and the next it’s bolting off after a squirrel, nearly ripping your arm off.
So, be prepared. We have no idea when (or if) the market will correct its course. No one does. Nevertheless, be ready by making sure your investment plan is aligned with your goals, you're rebalancing as needed, and never forgetting that when market volatility roars up, our job is to stay invested.
To being the master!
Adam K. Wright, CFA, CFP®
Adam is dedicated to providing fiduciary wealth management to help clients save money, invest better, and pay less in taxes. He believes that when you work with a credible and trustworthy financial adviser you will be able to improve your financial well-being.
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Wright Associates-“Wright”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Wright. Please remember that if you are a Wright client, it remains your responsibility to advise Wright, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Wright is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Wright’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at kswrightassociates.com. Please Note: Wright does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Wright’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.