Volatility - Good or Bad?

By:  Julie Bradsher, CFP

As a financial advisor with a long-term outlook for most of our clients, I typically shy away from discussions that focus on what’s happening in the stock market today.  Or what happened yesterday.  Or what might happen tomorrow.  If I knew the answers to those questions, well, you’d find me on the back end of Priority, our sailboat,  in turquoise waters –not sitting here at my desk, writing my monthly blog.

Let’s focus on what we do  know.  First, the volatility that we’ve seen over the past few months makes some folks restless at night.  It gives some heartburn and angst.  And it certainly gives our friends in the media something to write about.  Don’t forget the old journalism motto, “If it bleeds, it leads.”

Take this article in CNN Money, January 31, 2016: “Wild January stock market ends on a high note”.  The truth?  The Dow Jones Index was down 5.5% for the month, from January 1 to January 31⁽¹⁾. It was the deepest monthly decline since August 2015. My concern is not the market activity, nor the reasons behind it, but rather, on language such as “schizophrenic”  and “gut-wrenching drama,” not to mention the bogey – “recession.”  Most of us try to reduce the drama in our lives, and certainly don’t want it anywhere near our sense of financial security.

What we don’t see very much in the media are articles that lead with facts such as the average intra-year decline in the S&P Index since 1980 on a closing basis is 14.2% ⁽²⁾ - putting this into perspective, the 8 –day decline in the  S&P Index from August 17 to August 25  was 10.6% ⁽³⁾.  Unusual? No. Painful, yes--If you need the money September 1.

To put it into perspective:

• September 30, 2007, the Dow Jones Index closed at 13,930⁽⁴⁾. 
• February 1, 2009, the Dow closed at 7,062 – a decline of 49% point-to-point over 16 months⁽⁵⁾. 
• January 1, 2013, It closed at 13,860 - a gain of 96% from the trough ⁽⁶⁾
• February 1, 2015 the Dow closed at 18,132⁽⁷⁾.
• March 1, 2016 the Dow closed at  16,887⁽⁸⁾

If you did nothing, from September 30, 2007 to March 1, 2016, you’d have a gain of 21%.

Which brings me to a key  point of this blog.  If you need the money tomorrow, then it better not be in the stock market today.  If it is, then you’re not making a good long-range financial  plan with a high degree of success, but rather gambling and subjecting yourself to undo agony and distress.  Most of our clients have their money invested according to their own personal risk tolerance, their own timeline, and their specific financial circumstances and needs.  And that is the core of their financial plan.  It’s part of a long-term plan – and the portfolio funds the plan.

This allows them to tune out the siren call of the Harpies, err, I mean financial reporters, with their constant stream of loss, gloom, fear, scarcity, and doom.  It allows them to measure their progress over time, not day-by-day.    So – back to the beginning question– volatility, good or bad?  If you are taking advantage of the market dips and dives to add to your holdings, whether by an ongoing investing program or reinvestment of dividends and earnings, then it’s good.  You’re buying more shares when the market is down.  You’re  at Nordstrom’s when the shoes are on sale.  You’re rebalancing on a regular basis, taking advantage of  gains and buying what’s undervalued. 

We want to try and dampen some of the volatility through modern portfolio theory, so the lows overall in a portfolio aren’t so low that it takes longer to come back from. A 10% decline in value  does require a 11.2% gain in value  to get back to the starting point.   So too much volatility can make it harder to reach your planning goals.

Our approach?  It’s boring.  And it certainly doesn’t make headlines.  And I can’t pretend to predict the future, or understand China. But I do know how to help our clients weather these storms that surround us from time-to-time. And that is that once you chart a course, stay on it.  Like I try to do on Priority, when the bay whips up a good squall.

Sources:

Footnotes 1,4,5,6,7,8 - Yahoo Finance, Dow Jones Index Interactive Chart

Footnote  2 -  J.P. Morgan Asset Management “Guide to the Markets”, page 10

Footnote  3 - Yahoo Finance, S&P 500 Index Interactive Chart

Disclaimer: "Past performance is no guarantee of future results. Asset Allocation/Diversification does not assure a profit or protect against a loss in declining markets. Dollar-cost averaging does not assure a profit and does not protect against loss in declining markets."