This January has been one for the record books. The first 10 trading days were the worst start to the year ever for the S&P 500. This may not mean much, however, as the previous worst start was 2009, when the market posted a 32% gain for the year.
A headline in the WSJ last week read “Volatile Stocks Confound Investors”. If that is so, then we should look a bit deeper and ask why volatility is confusing and confounding. Through this lens we can view the truths about the stock market and what this means to investors.
- Neither the Federal Reserve, or China, or Europe or anything else can change the unalterable truths of the markets. Millions of market participants each day set prices based on available information.
- Volatility is not a synonym for risk. Instead, volatility is just a temporary change in market value. Risk, by contrast, is the probability of losing your entire investment, like the $2 lottery ticket that was a bust.
- Measured on a day-by-day basis, the long term bond market is often more volatile than the stock market. Yep, bonds can be scary too but you just don’t hear much about it from the financial media.
- Most investors own volatile assets (like stocks), because they want to maintain purchasing power over time. Take a quick look at the average inflation rate during your lifetime and then consider how to invest. You can’t maintain your lifestyle with investments earning 2% per year if average inflation averages 3% per year.
- During the average calendar year, the S&P 500 is down at some point by over 14%. Yet, about 75% of the time the stock market is positive for the year.
- We have seen this movie before…many times. The S&P 500 has declined 28 times by more than 10% since 1950; nine times by more than 20%; five times by more than 30%.
The non-confounding truths of the market start with the ultimate “healing” power of the capital markets over decades to withstand anything and everything. Time is the big volatility killer in the stock market, (remember time in the market, not timing). The even larger truth of the stock market is that however significant and scary any decline in value may be, these declines are always temporary. They always give way to eventual higher earning and higher share prices. Ready for a real conversation?