Market Volatility Makes “Obvious” Investing Hard To Do
Investment wisdom like “buy low, sell high” seems obvious. But market volatility makes it hard to achieve, tempting us to instead chase trends (buy high) and flee frights (sell low). For wiser, simpler investing, here are two insights to keep in mind about market volatility.
1. Market volatility is the norm, not the exception.
How often have you thought something like this: “The markets seem so crazy right now. Maybe I should back away, or at least wait until things settle down before I invest.”
The problem is, the markets rarely “settle down.” And when they do, we only realize it in hindsight. There are just too many daily seeds of doubt, forever being sown by late-breaking news, whether or not they come to fruition.
We suggest putting market volatility in proper context. Like the weather, expect market conditions to swing wildly and unpredictably, and resolve to stay the course. For example, according to a Dimensional Fund Advisors analysis, U.S. stock markets ultimately delivered positive annual returns in 33 of 40 years between 1979–2018. But at the same time, investors had to tolerate average intra-year declines of 14%.
2. Market volatility is your frenemy.
What if markets weren’t volatile? What if every day was like November 12, 2019, when the Dow closed at the same 27,691.49 price as the day before?
If prices never changed, traders would become unwilling to trade; they’d have no incentive to do so. In this extreme, markets would soon enough cease to exist.
What if they were just far less volatile? You would probably soon discover how much you missed those same, wild price swings you ordinarily cringe at. That’s because, long-standing evidence has informed us: By giving up extra volatility, you also must give up the extra returns you can expect to earn by tolerating the volatility risk to begin with.
“If you’re living in fear of the next downturn, consider shifting your thinking instead of your investments. Focus on controlling what you can control, such as how much you save, or finding the right stock/bond mix.” — David Booth
John A. Frisch, CPA/PFS, CFP®, AIF®, PPC™ founded Alliant Wealth Advisors in 1995 and has over 30 years of experience as a financial professional. In his free time, he’s an avid long-distance runner, a sport that requires discipline, patience and vision. John applies these same skills to his professional pursuits: He helps families and retirement plan sponsors adopt a patient, disciplined approach to overcoming financial challenges and reaching their distant goals along a clear path. Learn more at www.alliantwealth.com.