Does Your Portfolio Embrace Market Volatility?
Unquestionably the stock market has experienced severe volatility in recent months. But a review of the historical record provides a clearer perspective on market volatility over the decades that actually favors investors who manage to hang on even in the worst of market declines.
Since World War II, the stock market has experienced, on average, an intra-year decline of 14 percent each and every year. In that same period, the market ended lower, on average, by 18 percent every third year. Bear markets, with an average decline of nearly 30 percent, have occurred every fifth year. Yet, over that same span of nearly seven decades, stock market values have grown 100-fold, which means that, $1,000 invested in the stock market 70 years ago would have grown to $100,000 despite the periodic market declines.
The take away from this is that market declines have, thus far, been nothing more than a momentary interruption in an enduring market advance. Hence, volatility is simply a necessary phenomenon of a market that works. The stock market decline of 2008 will turn out to be nothing but a small blip for a portfolio invested for 20 years.
It took years for the investors who fled the market in 2008 to recoup their losses, while those who kept their sights on their objectives and otherwise stayed the course have enjoyed record gains in their portfolio. This clearly illustrates the human-induced danger of market risk – the risk of locking in losses as stock prices fall. History shows that the stock market rewards investors who avoid harmful behavioral traps such as attempting to time the market. The real detriment to an investor’s portfolio isn’t participating in the market decline; it’s missing out on the market return that follows.