Recent Market Volatility: What Affects a Stock's Current Price?
After a long period of relative calm in the markets, the increased volatility over recent weeks has resulted in renewed anxiety for many investors.
Since February, the US stock market has experienced some ups and downs resulting in many investors wondering what the future holds and if they should make changes to their portfolios.[1] While it may be difficult to remain calm during a volatile stock market, it is important to remember that volatility is a normal part of investing. Additionally, for long-term investors, reacting emotionally to volatile markets may be more detrimental to portfolio performance than the drawdown itself.
It is difficult to avoid the temptation to analyze every comment or action that affects the market, but that is precisely what a disciplined investor must do. There is a rather large profession that profits on people attempting to digest and make investment decisions based on the overabundance of information that saturates the news every day. It is impossible to predict the direction of the market on a consistent basis, so why attempt to do so? What we are currently experiencing is some rather significant changes in government policy. These changes along with other potential factors are feeding new information to the investment markets. The uncertainty of the outcome is leading to the current volatility. The price of your investments is determined by the current information available. As the information changes, so do stock prices.
What we need to remember is that the stock market is amazingly resilient over longer periods of time. There will always be new news that could be a catalyst for price change ofsome investments. In the graph below, we have provided six (6) rather drastic events in our recent history that demonstrate what happens to a balanced investment portfolio. You will see that in every 3 and 5-year example that a balanced portfolio began to recover more quickly after a crisis. We need to remain disciplined to benefit from a recovery.
The best investors do not allow emotion to control their investment behavior. With the help of the planning team at Private Wealth Management Group, our clients have explored their financial wellbeing in many different scenarios. We know that the markets are volatile, so we remain disciplined and profit during times of uncertainty. Our clients profit by sticking with an investment plan that was established using your personal needs and circumstances in conjunction with your time horizon. Investment parameters have been established that guide decisions during good times and bad. We will not allow the current volatility to derail the long-term goals.
As investors, we have been spoiled in the very recent past with little volatility.
Two simple examples; 2017 was the first year since the 1800’s that did not experience a down month. Since 2009 every year the US stock market has experienced positive outcomes even with intra-year volatility. The US Large Cap Market Intra-Year Gains & Declines vs. Calendar Year Returns graph provides some data to prove these points. The lines provide the range of return in any given year and the blue bar provides the annual return for that year. One other very important suggestion I would like to make.
When listening to the news, please do not listen to the point declines - instead listen for percentages.
In the future, if you want real peace of mind, trust that you have done your planning and you have no control over what is taking place in the market and turn off the pundits pretending they can predict the future.
Considering the current volatility, you may be tempted to sell your investments to avoid the volatility, however it is impossible to predict the direction on a consistent basis. In addition, you would need to know when to get back in to the market.
The graph, titled Reacting Can Hurt Performance, shows the annualized compound return of the S&P 500 Index going back to 1990 and illustrates the impact of missing out on just a few days of strong returns. The bars represent the hypothetical growth of $1,000 over the period and show what happened if you missed the best single day during the period and what happened if you missed a handful of the best single days. The data shows that being on the sidelines for only a few of the best single days in the market would have resulted in substantially lower returns than the total period had to offer.
Conclusion
While market volatility can be nerve-racking for investors, reacting emotionally and changing long-term investment strategies in response to short-term declines could prove more harmful than helpful. By adhering to a well-thought-out investment plan, investors may be better able to remain calm during periods of short-term uncertainty. Let’s try and focus on what we can control.
[1]. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes.
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