The recent market volatility has not been fun to go through. In fact, January 2022 has been one of the worst starts to a year in recent history. Should this give you reason for concern? While the volatility we have experienced so far this year is not pleasant, it’s also not surprising given the fact that the U.S. market has just had one of the best 3-year periods in history. Let’s take a deeper dive into what this means.
On any given day, you should expect the market to be positive about 54% of the time. In other words, the market has negative days about 46% of the time! The blue color represents positive daily returns, and the yellow represents daily negative returns.
But as we expand our time horizon to look at monthly returns over the last 50 years, we see the probability of positive months increases (there is more blue than yellow)
And if we expand our time horizon to start looking at quarterly returns, we see that the probability of positive quarters increases dramatically. In other words, most quarters are positive. Notice, you start to see much more blue (positive returns) than yellow.
And as we expand our time horizon even further to look at annual returns you start to see that most years are positive.
Since 1970 we have had only 7 negative years in the U.S. stock market. The stock market is a wonderful wealth building machine if we give it enough time! And as we have always said, volatility is your friend CLICK HERE.
Why is volatility your friend? There is a phenomenon known as the equity premium. CLICK HERE.
The equity premium is the excess return that investing in the stock market provides over a risk-free rate. This excess return compensates investors for taking on the relatively higher risk of equity investing. In other words, if you are going to put up with the short-term volatility (that can often feel wild at times!) you demand an excess return over the more stable bond returns you receive over time. This is why the stock market produces better returns than the bond market.
An investor requires this compensation in order to put up with the volatility. While the volatility is not fun, it is a requirement in order to receive better returns over time. Where will the stock market end up this year? The reality is that no one knows for sure. But with history as our guide, the market will likely be higher in 5 years than it is now. Will there be another bear market? CLICK HERE
The average decline is 28% and the average duration was 13 months. Recovery back to pre-bear market valuations can take another 2 years. However, a 60-year-old with a 30-year time horizon has plenty of time to weather the storm and have your stock allocation recover and continue to grow to help you keep up with inflation.
Bonds in your portfolio represent the “safe haven” where you can continue to take your monthly distributions in retirement and allow your stock investments the time they require to recover from short term drops in price.
It’s important to maintain your long-term perspective and keep your discipline while going through short term bouts of volatility. If you have questions or would like to discuss it further, please do not hesitate to contact our office.