Broker Check

Context Regarding Market Volatility

March 10, 2020

Attached you will find a chart titled "Annual returns and intra-year declines".  It shows that despite average intra-year declines of 13.8%, annual returns are positive in 30 of 40 years.  This demonstrates that because the market is down right now, it doesn't necessarily mean the market will be down at year-end.  Historically, even when the market did not finish the year in positive territory, the negative year-end return was not the lowest the market had been during the year.  As I like to say, it ended the year "less bad" than at its worst moment during the year.  I realize the past is not a predictor of the future, but it often "rhymes" - which is why I want to give you some perspective based on history.

I realize the volatility we are experiencing right now is unsettling, but my personal belief is that it doesn't signal the end of the world.  It does signal that a lot of good companies are on sale right now and that when the dust has settled, there will be many buying opportunities.

For those of you who are in 401(k) plans, your payroll deferrals are being deposited on a regular basis, and you are buying while things are on sale!

There is never a bad time to revisit your risk tolerance and evaluate your long-term goals and to check to be sure your asset allocation is appropriate considering your risk level, timeframe, and goals, and adjust where necessary.  To adjust your allocation or rebalance is one thing.  On the other hand, I strongly encourage you to keep calm, and not sell out, because in the long term you may regret it.

When you listen to the news and hear about "point drops", it sounds scary.  I suggest you not think in terms of point drops.  Think in terms of percentage drops.  The Dow Jones Industrial average was at 28,548 at the end of last year.  It closed at 24,970 last night (3/09/2020).  That's a 3578-point drop, but to put it into perspective, it is only a 12.53% percentage drop.  When you look at the Dow's market high on 2-12-2020, the percentage drop is 15.11%.

According to Investopedia,

  • "A correction is a decline of 10% or greater in the price of a security, asset, or a financial market.
  • Corrections can last anywhere from days to months, or even longer.
  • While damaging in the short term, a correction can be healthy, adjusting overvalued asset prices and providing buying opportunities."

We are in correction territory.  I know it is uncomfortable, but I encourage you to keep things in perspective.  A correction is a "normal" phenomenon.  According to Investopedia, "between 1980 and 2018, the U.S. markets experienced 37 corrections".  The markets made it through each one of those and I have confidence that "this time" will be no exception.

If you want to talk, we are here.

Annual Returns and Intra-Year Declines