Many of us worry and fret about all sorts of things. In times like these, it’s good to remember that worry can translate into invisible, yet very real costs. Uncertainty and anxiety are perhaps the largest costs in the investment markets but often are not even recognized as such.
A recent article in Fortune carried the title “Investors Lose $1.78 Trillion so far this Year”. Both the premise and the title are woefully ignorant and inflammatory. Investors, (as opposed to speculators), have a long term timeframe and anticipate that market values fluctuate. You only lose if you sell in a panic. The article also is an instant example of the behavioral bias known as anchoring.
A constant refrain throughout the financial media is that the stock market today is somehow different and more volatile than in the past. This assertion is not supported by historic evidence.
The chart above depicts the average daily price swings of S&P 500 Index over the past 65 years. This reflects very small changes in actual volatility, so small in fact, that statistically the slope of change is essentially zero. Short term spikes happen of course, but even over the past few years, volatility is very close to the long term average.
The media wants and needs turmoil. Hype attracts viewers/readers and sells advertising. The evidence is just a minor inconvenience. The truth is that volatility is the path to long term returns. The average daily change in the Dow during 2015 was 127 points, so a 300 or 400 point swing up or down during a given day should not be thought of as unusual…just noise.
What actually matters most are your goals. Day to day market moves are near meaningless within the context of what you are trying to accomplish financially. How much risk you need to fuel your financial plan is what you should focus on and understand. Ready for a real conversation?