{"id":12978,"date":"2020-04-15T09:51:21","date_gmt":"2020-04-15T16:51:21","guid":{"rendered":"https:\/\/canary.kcprod.info/blog\/?p=12978"},"modified":"2022-01-11T17:12:18","modified_gmt":"2022-01-12T01:12:18","slug":"why-you-should-expect-more-market-volatility","status":"publish","type":"post","link":"https:\/\/canary.kcprod.info/blog\/why-you-should-expect-more-market-volatility\/","title":{"rendered":"Why You Should Expect More Market Volatility"},"content":{"rendered":"\n

The past two months have been tumultuous for investors. As COVID-19 has spread, global markets have been extremely volatile. In mid-February, the S&P 500 was at an all-time high. In the weeks since February 19, we\u2019ve experienced both the index\u2019s fastest decline (33.9% in a little over a month) and its best three-day period since the 1930s. It\u2019s no wonder some investors are feeling uncertain about what the future might hold. Recent sharp rallies (or increases in prices) might lead you to wonder if the S&P 500 is already on its way to recovery. But it\u2019s too soon to say.<\/p>\n\n\n\n

We don\u2019t have a crystal ball, and we have no way of predicting whether global markets will fare better or worse in the short term. But we can look at history for context about how markets have behaved in the past. Our educated guess? There\u2019s likely more volatility ahead, but that should have no bearing on your long-term investing strategy.<\/strong><\/p>\n\n\n\n

A historical perspective<\/h2>\n\n\n\n

History shows that market crashes usually aren\u2019t smooth. Instead, there\u2019s often a bumpy ride to the bottom with lots of false starts. We analyzed S&P 500 declines of more than 30% as far back as the Great Depression to see what has historically happened on the way to the trough. Our analysis shows that the S&P 500 rallied more than 5% an average of 7.7 times before finally bottoming out. The average rally was 12.12%.<\/p>\n\n\n\n

\"\"
Source: Wealthfront<\/figcaption><\/figure>\n\n\n\n

Let\u2019s look more closely at a recent example. Many of us remember the financial crisis that began in late 2007 and bottomed out in March of 2009. What you might not remember is that the S&P 500 rallied many times \u2013 increasing by at least 5% on nine occasions \u2013 before finally hitting bottom. The average size of those rallies was 10.87%, and the largest was 24.22%. The graph below shows the S&P 500\u2019s decline from late 2007 until early 2009, and as you can see, it was anything but smooth.<\/p>\n\n\n\n

\"\"
Source: Yahoo Finance<\/figcaption><\/figure>\n\n\n\n

So what does that mean for you? In the short term, we encourage you to manage your expectations. The rallies we\u2019ve seen recently aren\u2019t necessarily a sign that the S&P 500 is on the mend just yet. In the long term, however, these bumps mean nothing: markets tend to rise over time and there\u2019s no reason to believe this time will be any different.<\/p>\n\n\n\n

Volatility is a feature, not a bug<\/h2>\n\n\n\n

Short-term volatility isn\u2019t necessarily a bad thing. In fact, it\u2019s a normal part of investing for the long term. A recent New York Times<\/em> article<\/a> did a nice job explaining the role volatility plays in the stock market. Neil Irwin wrote: <\/p>\n\n\n\n

\u201cThe fact that stocks are extraordinarily volatile right now, in that sense, isn\u2019t a problem with stock investing \u2013 it\u2019s a feature! If it weren\u2019t for these periods of fear, stocks would trade at levels that offer returns more like bonds or cash. The fancy academic name for this is the \u2018equity risk premium,\u2019 but an ordinary saver can simply think of higher long-term returns as the compensation you get for tolerating volatility.\u201d<\/p>\n\n\n\n

It\u2019s normal to find volatility uncomfortable \u2013 experiencing loss (even if it\u2019s temporary) is painful. But it\u2019s important to remember that you don\u2019t actually lose any money until you sell your investments for less than you paid for them. If you haven\u2019t sold your investments, you haven\u2019t lost money on them. We encourage you to continue putting money into the market regularly, whether you invest with Wealthfront or someone else. In fact, investing regularly in a volatile market can yield better returns<\/a> than investing in a steadily rising market. This is why it\u2019s so important to stick to your investing plan regardless of the external environment. <\/p>\n\n\n\n

Many people find themselves in challenging circumstances right now, and we think it\u2019s important to be realistic about what\u2019s to come. In all likelihood, investing will be a bumpy ride for a while \u2013 and it\u2019s a good reason not to check your portfolio too often. Instead, you should stay calm and keep investing for the long term. <\/p>\n","protected":false},"excerpt":{"rendered":"

The past two months have been tumultuous for investors. As COVID-19 has spread, global markets have been extremely volatile. In mid-February, the S&P 500 was at an all-time high. 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