Market Volatility: Don’t let the noise distract you
Updated: Jan 18, 2021
It seems like every time we open the news these days we see a new headline about the market selling off, new calls for a recession coming soon, global trade uncertainties, rising interest rates fear, emerging markets turmoil, and so on. Truth of the matter is although these fears and concerns aren’t baseless, you just shouldn’t make adjustments to your portfolio every time there’s something new as many forecasts are often inaccurate and not even the professionals are able to call a downturn (consistently).
To put things in perspective, even after a five days selloff in the S&P500 we’re still up close to 7% on the year which is almost in line with historical average returns, and rates that are at still historically low levels are rising for the right reasons due to strong economic conditions and good corporate earnings.
To start, it is important to mention that this volatility so far in 2018 isn’t unusual, in fact 2017 was the outlier year with one of the lowest volatility recorded in decades. Since the end of 1945, there has been 78 market pullbacks of 5-10%, 27 corrections of 10-20%, and 11 bear markets with declines of more than 20%. Another way to put it: the market pulled back between 5-20% on average 1.43 times a year, and this year so far hasn’t been out of the ordinary.
It’s important to add that timing the market is a dangerous game to play, even without factoring in trading costs and taxes incurred from short term transactions, a report by Putnam have found that market returns between 12/31/2002 and 12/31/2017 have averaged 9.92% on an annual basis, investors who have missed only the best 10 days in those 15 years have had annual returns of 5.03% (missed out on approximately half of the returns), investors who have missed the best 20 days have had annuals returns of 2.09%!
In conclusion, markets are cyclical in natures, and sell-offs are almost inevitable so don’t let volatility dictates your behavior, stay invested according to your risk tolerance, time horizon, and focus on the end goal rather than day to day fluctuations.