Don't Let the Stock Market Yo-Yo Get in the Way of Good Investing Habits
Mercy – volatility sure returned in 2018! So, what in the world does this term actually mean? It’s a term investment professionals love to use when the stock market goes crazy! We, too, are guilty of using the term without providing further clarification of what this concept really means.
If you think of it as a yo-yo, volatility is essentially measuring the ups and downs. Headlines often portray this as investors’ most fearsome enemy. And it is true – even the most seasoned investor can be a little nervous in volatile markets. If you were a little nervous about the stock market decline during the fourth quarter of 2018, it’s okay – it’s perfectly normal.
Volatility was fueled by trade tariffs, mid-term elections, Fed policy decisions, etc. Yes – the midterm election uncertainty is gone, but other contributing issues are not. Geopolitical uncertainty, concerns surrounding Fed policy tightening, and unresolved trade disputes with China are still present. Investor sentiment moved from excessive optimism to pessimism. For these reasons, our outlook for 2019 continues to be best described as cautious. Ongoing bouts of volatility (i.e. market up 3.43% one day and then down 3.65% the next, etc.) are unlikely to go away any time soon. So, what can we do to manage our emotions during these times?
Surprisingly, volatility is not a villain, nor is it always a synonym for investment losses. For long-term investors – it can actually be a great thing. Without it we shouldn’t expect a higher return for investing in stocks compared to more conservative investments like CDs, money market funds, bonds, etc.
Short-term volatility, like we experienced in the fourth quarter of 2018, is the price investors pay for long-term performance. In other words, we have to be willing to put up with the occasional roller coaster stock market ride. Historical data shows that over long periods of time, investors have been compensated for holding riskier investments with higher returns compared to those with less risk.
Notice how fast returns grow over ten years using the daily S&P 500 Index table. Day-to-day markets will go up and down but over a long period of time (i.e. 10 years), the likelihood of generating positive returns significantly increases.
If you’re looking at your accounts daily, you may see larger fluctuations than in recent years. Just remember, these larger fluctuations do not represent the returns we expect over the long-term. As Nobel laureate Daniel Kahneman said, “If owning stocks is a long-term project for you, following their changes constantly is a very, very bad idea. It’s the worst possible thing you can do.”
Sure – the less frequently you peek at your portfolio, the less likely you are to see a loss and potentially feel fear and unhappiness. The opposite is true when markets are doing well. OLIO is a big believer in education, and we know money is very important. If you find yourself looking at your accounts and feel uneasy, remember these points and don’t hesitate to reach out to us. We view it as an opportunity to teach and walk together with you on this long-term journey.
The returns we expect from investing don’t necessarily show up every day, every week, every month or even every year. The longer we stay invested, the more likely we are to capture them. The market is doing its job and we believe the rewards will be there if we remain disciplined. We’ll leave you with this piece of folk wisdom, “The essence of self-discipline is to do the important thing rather than the urgent thing.”