Volatility is part of investing, but volatility is not RISK. Risk is losing money in long, drawn-out market crashes. However, without the proper mindset and behavioral training, market volatility can cause stress like no other. Take for instance, the following two pictures I snapped from my cell phone on Friday. Something told me it was going to be a fun day to share with my readers just how volatile markets can be! Read the alerts from bottom-up…
Sorry for the bad stitch job. I wanted to put them all on one picture, but to summarize, the Dow opened UP 200 points, then turned negative, then went down -300 points, then down -350, then down -400, then -500, an finally turned positive a +200 points before closing up big on the day. How’s THAT for volatility?!
I can’t reiterate more how crucial it is to step back from your hard-earned retirement dollars and try not to look at it daily…or even monthly. This is difficult for a lot of people, especially if you’re the personality type that likes to stir your noodles the entire time they’re cooking. Get it to an even boil and walk away! You’ve got stuff to do!
My friend Mark Zinder managed to find a great quote today and I thought I’d share:
“Despite the enormous wealth-creating power of the stock market, looking at it too closely can be terrifying. A daily look at portfolio values means you see a loss 46.7% of the time, whereas a yearly look shows a loss a mere 27.6% of the time.”
That quote is from The Center for Outcomes and can be found in their publication on February 6th of this year, but Wow! Talk about powerful – and true!
The market “breathes,” as I’ve mentioned so many times before. The following chart can be seen in the market commentary I wrote back on January 26th – but you can see the new one, updated below.
This is the S&P 500 with a 20-day moving average (dotted line in the middle) with 3% “cushions” (or tolerance bands/envelopes) on both the top and bottom. These envelopes correspond with the moving average – or trend – itself and while last time I shared this chart with you, I was pointing out how “overheated” the market was when it peaked ABOVE the +3% envelope… this time I want to point out how oversold it is, now that it’s fallen deep below the bottom -3% band.
The last few times we’ve seen S&P 500 pull back (or correct) this hard, it might’ve taken a second “test” of the previous lows (in the first two corrections, above), but the point here is, if we’re in a long-term uptrend (like we are right now), these pullbacks or corrections should be viewed as buying opportunities.
The following chart from the Stock Trader’s Almanac shows us that, whenever the Dow and S&P 500 drop by -4% or more in a single day, it can take some time before we start to see the market find some traction…
However, when you consider the fact that:
- Midterm election years are generally pretty good for the market, and
- All three of the Stock Trader’s Almanac’s “Trifecta” were positive this year (The Santa Claus Rally, First Five Days of January, and the January Barometer).
…the probabilities for a positive 2018 are on our side. As you can see below, historical tendencies favor a strong January, weak February, a strong March and April, followed by a relatively “flat” summer, finishing with a strong final trimester.
Now, as I mentioned last week, “History doesn’t necessarily repeat itself, but it sure does rhyme.” So while the information above is based on 67 years of data, it doesn’t mean we’re destined for the exact same outcome. I do think that it offers some evidence that should be considered as part of an overall retirement portfolio management strategy, however.
In closing, I’d like to offer some perspective. The great bull market of the 90s was the biggest up-market this country has ever seen. Still, the market experienced seven corrections of -10% or more in the ten years between 1990 – 2000. So what we just experienced this past couple weeks is something we should not only get comfortable with – we should come to expect it! Corrections and pullbacks are part of the normal, healthy market cycle and something that should be embraced.