November 2019 Monthly Insight – Volatility Can Be Spooky

Posted By T. Lee Sherbakoff, CPA/PFS, CFP® on Nov 1, 2019


“Stay in your seat come times of trouble. It’s only people who jump off the roller coaster who get hurt.”

– Paul Harvey, American radio broadcaster for the ABC Radio Networks

Over the last five years you have received our Monthly Insight letter.  The purpose of this communique is to explain investment principles, educate the reader on how The Nalls Sherbakoff Group views investing and the market, and illuminate you on investor behaviors—specifically, on those cognitive biases that lead investors to make inappropriate decisions at inappropriate times, which may result in unexpected results. Trying to time the market, chasing after last month’s or last year’s best performing stocks, or panicking out of the market during times of volatility could result in missing out on the upside that historically follows market drops.

Volatility can be scary, but it’s the volatility of stocks that supports the higher expected returns that investors demand over other less risky, less volatile assets you can invest in.  Over the long-term (1998 – 2018) stock returns for U. S. stocks have averaged around 5.6%.  Keep in mind, during this period there were two significant bear markets, defined as a 20% or more decline from the previous market highs.  In March of 2000, the tech bubble dropped 49% over 30 months, and in October 2007, the Global Financial Crisis dropped the market 57% over 17 months.

Indeed, these were very tough times to be in the market.  However, very few people were expecting such devastating bear markets—just as very few people at the beginning of this year were expecting the U. S. stock market to hit a new all-time high last Monday and then again on Wednesday, closing at 3,046.77.  By the way, at the low of the 2000 tech bubble, the stock market bottomed out at 777 on October 9, 2002, and at the low of the Global Financial Crisis, the market bottomed out at 677 on March 9, 2009.  Since those dates, the market is up 291% and 348%, respectively.

Oh, but what a roller coaster ride it has been!

The two tables to the right show the top 10 largest daily changes both by percentage change and by absolute point changes over the 1998 – 2018 period.  As you can see in the top table, 2008 was a very volatile year with 11 of the top 15 percentage changes occurring in 2008, with 6 of the worst days and 5 of the best days.  Clearly, it’s doubtful anyone could have timed the market that year. 

The bottom table on the right shows the top 15 days with the highest point changes either up or down.  With the markets up so much over the last 10 years, you’ll see relatively large point changes in the last couple of years, with relatively lower percentage changes.  However, as denoted with the asterisk, five days meet both largest percentage change and point change.

You cannot predict the timing and magnitude of volatility, but you can plan for it.  Understanding your risk tolerance and financial goals and objectives, you can set your appropriate portfolio allocation.  The through portfolio diversification, strategic rebalancing, and patience, you have a good chance of meeting your long-term financial goals by capturing the “volatility premium” of long-term investing.

If you have questions, let’s talk. That’s what we’re here for. As always, we are grateful for your confidence in us to serve as your financial advisor.