Market Volatility – Why We Owe You a Heartfelt “Thank You"
Some of you may have noticed that since the beginning of October market volatility has picked up. If you watch any financial news or read publications, you are reminded about it almost daily. It may even be giving a few of you some indigestion, so what I would like to do is make a case as to why volatility, in the long run, is actually your friend and not your enemy.
First, let’s go over what is called the “Equity Risk Premium”. Per Investopedia, the equity risk premium “refers to the excess return that investing in the stock market provides over a risk-free rate. This excess return compensates investors for taking on the relatively higher risk of equity investing” *. This excess return is required by investors to compensate for extreme uncertainty of market fluctuations in the short to intermediate time horizons. Per JP Morgan Asset Management**, as of 9/30/18 the average number of daily 1% moves up or down for the first 3/4th of this year was thirty-six while in 2017 we only experienced eight such moves which is why for some this year may feel a lot more volatile than normal. However, for some perspective the average 1% moves up or down per year from 1980 to present is sixty-two! Even with all these fluctuations the S&P 500 has been positive 75% of the time over a one-year period, 90% of the time over a five-year period, and 97% of the time over a 10-year period dating back to 1929.
So how does this relate to the average rate of return over the long term? Over the last 90 years the S&P 500 index has had an average annualized return of 9.8%*. It has also averaged intra -year declines of a little over 13%. The only way that we can demand substantially higher rates of return over bonds and cash all comes down to certainty.
In cash we know that $100,000 today will be $100,000 in a year from now and the same holds true for CD’s. The same cannot be said about equities. No one can accurately predict were the S&P 500 will be in a year from now and if they insist, they can, I strongly suggest that you find another advisor. The point is that the markets short term volatility is what enables patient investors to realize much higher average rates of return over other “safe” investments. If there were no volatility, the average rates of returns for equities would fall until they were on par with CD’s and cash. So this is why I say “Thank You” to market volatility and, assuming you have a financial plan in place built to ride it out, so should you!
One last thing is an interesting fact I came across:
The last midterm election after which the market was lower 12 months later took place on:
November 5, 1946***
I hope you found is information to be helpful. As always, if you would like to discuss this in more detail, please feel free to reach out to us at DCH Wealth Management or give me a call at 727-914-7462 and we can talk. Have a Happy Thanksgiving!
Sincerely,
David Henderson
*Investopedia
**JP Morgan Asset Management Guide to The Markets U.S. 4Q As of September 30, 2018
***Source: Strategas Research, cited by Robert Doll in the posting “Improving economic growth and sentiment should help equities.” September 18
This is being provided for informational purposes only, and should not be construed as a recommendation to buy or sell any specific securities. Past performance is no guarantee of future results, and all investing involves risk. Index returns shown are not reflective of actual performance nor reflect fees and expenses applicable to investing. One cannot invest directly in an index. DCH Wealth Management, nor any of its members are tax accountants or legal attorneys, and do not provide tax or legal advice. For tax or legal advice, you should consult your tax or legal professional. The views expressed are those of DCH Wealth Management and do not necessarily reflect the views of Mutual Advisors, LLC or any of its affiliates.
