Ups and Downs
Let’s face it. Investing has been easy the last few years.
It has not required much investing know-how to earn unusually high returns on nearly all stock investments in the past two years. Large companies, small companies, foreign companies, they seemingly all went up. Even more, volatility – the ups and downs of the market – virtually flat-lined last year. After such a tranquil period, investors may be lulled into thinking the calmness can continue.
Be warned, though. To flip a well-worn saying, “What goes down must go up.”
In fact, the first quarter of this year introduced far more stock market swings than investors endured in all of 2017. These gyrations can be scary. But they do not mean investors should be afraid of staying invested in the stock market.
Volatility is a normal part of inve
sting. It should be expected. Any number of events can cause stocks, and thus the stock market, to convulse: missed earnings, emerging competitors, new regulations, political maneuvers, interest rate changes, and the list goes on. With so many potential triggers, investors should not be surprised when markets experience bouts of instability.
The nearby chart reveals how often the U.S. stock market hops and drops on a daily basis. As you can see, volatility over the past 10 years or so has been commonplace.
What is not commonplace? A year like 2017, when the stock market moved up or down by 1% or more on only seven trading days and never by 2% or more.
What does this mean for your portfolio? Potentially a lot, but probably nothing. The determining factor is whether your portfolio’s investment mix is right.
If you have a well-diversified portfolio with appropriate amounts invested in stocks, bonds and cash, then volatility is simply a nuisance, not a reason to change your portfolio. If your goals have not changed, then your behavior should not change when the market overreacts from time to time.
If, however, your account is invested too highly in stocks given your age or risk tolerance, you should not wait to act. In that instance, you cannot afford – emotionally and/or financially – to bear the volatility of the stock market. A change is needed now.
The recent volatility may be as bad as it gets for some time, or it may be the beginning of a new era of amplified volatility. No one knows. The best advice: Make sure you and your portfolio are ready for either scenario.