If you have been paying attention to the financial news the past two weeks, it is no secret that the stock market has been very volatile. After hitting an all-time high at the end of July, we have seen markets go the other direction, as fears of a trade war escalate, bond yields are dropping, and the possibility of a recession looms. While all of those things do present headwinds for a rising stock market, we want to remind you to stay calm and remember that historically the market has trended up over the long run.
Using the S&P 500 as an indicator of the overall U.S. market, and focusing on periodic highs and lows over the last 12 months, the following chart illustrates just how volatile the stock market can be in a relatively short period of time.
Over the periods listed, three of them had swings in excess of 10%, with the largest exceeding 20%. However, if you look at the change over the past year, you will see that the market is slightly up (even with the downturn over the past two weeks). Many investors panic and sell during the low points and re-enter the market once it starts to recover, effectively buying high and selling low.
Our approach to investing recognizes that there will be declines in the market and often times significant declines, sometimes for extended periods of time. And while the market will not always recover in a year’s time (and there are no guarantees going forward), the volatility and recoveries illustrated above are representative of what has been historically true over longer periods of time. That is why we don’t attempt to time the market; instead, we take a disciplined approach to investing. We stay focused on the long-term and recognize that there are going to be significant amounts of “noise” from time to time. The best way to handle that noise is to begin with a sound plan, stay calm, and stick to the plan that you have in place.