Stock market volatility continues unabated. It may be too early to tell, but I’m marking the top of this current market correction at July 20, with the bottom still to be determined (though I’d say it’s still a few weeks off). Since July 20, investors have had a rocky ride with the market having traded down 1%, or more, in 10 of 45 trading days (through September 22). Quick math indicates the market has fallen over one percent 20% of the time in the last two months. That sure feels like a lot.
In this pronounced patch of volatility, investors are constantly tempted
to sideline their portfolios (wait in cash) to let the market cool
before recommitting to stocks. I’d guess that in each of those 1% or
more down-days, a slew of investors headed for the exits, selling
equities with the intent of “waiting it out.” In my view, that’s a
mistake.
Maintaining Perspective and the Dangers of Bad Timing
Indeed, history tells us – time and again – that such a move is often
ill-advised and costly. Downside volatility is not only common in bull
markets, it’s often been worse than what we’re seeing today. Headline
grabbers like this one from August 24 stating “After Historic 1,000
Point Plunge, Dow Dives 588 Points to Close” can freak-out even seasoned
investors. “Historic Plunge. Dow Dives.” Makes one queasy. Reality: the
market (measured by the S&P 500) fell 3.94% that day – hardly its
worst day in history – and, it is positive since then.
Think about it: the market is positive since then. You simply will not
see this narrative in the news because optimism doesn’t sell. But, that
is the perspective most investors need to ‘stay cool’ when the ‘heat
turns up’ to keep their eye-on-the-prize for the longer term outlook
(which I still believe is positive for stocks).
Instead, many see current market volatility as unprecedented, because
it’s easy to forget historical patterns. But, it’s simply not
unprecedented and, in fact, it’s rather ‘light’ so far. Here are a few
factoids to help keep us grounded:
• Since the Great Depression, the S&P 500 has fallen more than 5% in
one day on 20 different occasions – it hasn’t once in 2015.
• The market has fallen over 1% in ten trading sessions over the last
two months. While true, what’s missing is that no one ever talks about
upside volatility! The market has also risen more than 1% in seven of
those days, meaning that on any given day the market is almost as likely
to pop as it is to dip (over time, it’s more likely to rise, as the
market has historically risen more than it has fallen).
Moving to the sidelines in cash can hurt if you don’t time the market properly, which few can:
• Since 1929, in the 12 months following the end of a bear
market, a fully invested stock portfolio had an average total return of
+37.4%. But, if you missed the first six months from the bottom of a
bear by being in cash, your return would have only been 7.5%.
• Between 1995 and 2014, a fully invested $10,000 portfolio (in
the S&P 500) would have grown to $65,453, for an annualized return
of 9.85%. However:
•
However
, If you missed the 10 best days in that time span, your investment
would have only grown to $32,665, or an annualized return of 6.10%.
Miss the best 30 days, and you barely annualize 1%.
Bottom Line for Investors
Remember that volatility works both ways, and a market recovery
following a correction is often just as steep as the preceding decline.
This means the window for timing a correction is typically extremely
narrow and is simply not worth the risk trying to get right. Going back
to the example of missing the 10 best days from 1995 – 2014, it is also
true that six of those 10 best days occurred within two weeks of the 10
worst days. Read: the market tends to whipsaw. If you sell after a
really bad day, chances are one of the good days you need for recovery
is right around the corner. My advice – keep your cool; your portfolio
and blood pressure will appreciate it.
That said, it is important to be wary of changes in the market and to
regularly assess your investments and allocations. Would you like to
know what our research experts are predicting for the market in the next
month and over the years to come?
I have arranged for you to receive our "hot-off-the-presses" Zacks
Market Outlook, October, 2015 free of charge. It alerts you to a period
of increased risk, but you may be surprised by opportunities that are
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