Along For The RideSubmitted by InFocus Financial Advisors, Inc. on June 28th, 2017
Volatility is the price we pay for long-term investment gains, that’s no secret. Our behavior on the other hand is usually what determines how much of those long-term gains we capture. Also, to what extent we are emotionally capable of riding this rollercoaster of volatility. While those are pretty obvious statements, what kind of volatility is considered normal? At what point would it make sense to sell? Those are the harder answers to get to, and will be determined based on your goals and your life circumstances. However, we can look at historical data to give us a perspective of what is “normal” and what you can expect in the long-run.
One of my favorite charts seen below is from page 13 in the J.P. Morgan Guide to the Markets for the 2nd Quarter of 2017. It illustrates annual returns since 1980 as well as the largest intra-year decline.
Those lovely positive returns, which occurred in 28 out of 37, years were only achieved if we managed to hold on through the sometimes pretty severe volatility. Few things can be said with certainty when it comes to investing but one of those things is that you will likely experience volatility in any given year. “Normal” volatility illustrated in the chart above was an average decline at some point during a calendar year of 14.1%. Think about that for a second. You had to let your investments decline on average 14.1% in any given year, to experience a positive return 76% of the time. A 14% decline is certainly significant, but it is also very normal.
Assuming you had the wherewithal to endure such frequent declines you would have experienced a significant increase in net worth. As we know all too well, people are not built to act rationally in the face of volatility when our life goals are on the line, and are actually quite adverse to it. So what should you be doing today to prepare yourself for this rollercoaster?
You should have a strategy and a plan to implement that strategy. There are plenty of different strategies, investment theories and vehicles for you to choose from. The biggest determinant of your success is your wherewithal to stick to that plan. Abandoning ship in the first storm is going to make it much harder to get back to dry land.
Identify your goals. You need to make your investments last for a long-time in retirement. You also need to grow those investments. What kind of portfolio makes sense for you to reach your goals? Frequently people take on too much risk, or not enough risk and are disappointed with the results and buy in or sell out at the complete wrong moment. Knowing what you need to be successful will help you determine your tools of the trade.
Understand volatility is normal. Lately it seems like the market only has one direction (going up), and that volatility is a thing of the past. Remember that investing involves risk*. When we do experience volatility, remember this is the normal price you have to pay to hopefully reach your long-term goals. Hold on to your strategy, prudently invest based on your goals and you will take several steps in the right direction of long-term investing success.
*Investors cannot directly invest in indices and past performance does not guarantee future results.