Broker Check

Is Volatility Back In Vogue?

October 13, 2021

From the time markets open, until the closing bell, securities are in a state of constant change.  The value of stocks and bonds fluctuate all day as buyers and sellers react to breakout news, such as the Federal Reserve’s interest rate policies, geopolitical events, earnings releases, announcements of innovation in drugs or technology, etc.  Market participants reflect on the ongoing news and adjust their estimates for prices.  In aggregate, their trading decisions based on changing prices impact markets, diving them higher or lower on a daily basis. 

Yet sometimes these moves seem to be very volatile.  We are sensitive to this volatility at Henry Wealth Management, but also feel that reacting to it will be hazardous to your wealth.

Below is a chart representing Daily Returns of the S&P 500 over the past year. While volatility was more extreme through Feb, of  2021, with many days seeing moves of 2% up or down, since then, volatility has been tamer. Until seemingly recently.  

U.S. equities markets climbed higher in July and August on optimism regarding economic recovery, driving the US Market index to 19 new highs, before wiping out the majority of those gains and plunging the other direction amid worries about the impact of the coronavirus' delta variant on the economy, supply chain slowdowns leading to shortages across a number of key industries, and a regulatory crackdown in China.  Check out below, what has happened since the beginning of September:

By nature, investing entails dealing with market volatility. Trying to make buy or sell decisions based on short-term fluctuations, however, can create an extremely uncomfortable, and costly, investment experience over time.

Avoiding the big market swings is certainly alluring, however, the markets worst days are equally dispersed among its best days (i.e. they often go hand-in-hand), and just as difficult to identify in advance.  Studies have shown that missing the markets worst days would indeed increase investment returns when compared to a buy-and-hold investor's gains over the same time.  To achieve these results, an investor would've had to pick the worst days to get out of the market, then they would have to get the timing right for when to get back in the market.  This is not investing as we are fond of saying, but rather, is analogous to gambling.

As you can see on the chart below, simply missing a handful of the best days can result in a significant underperformance relative to a buy-and-hold strategy.  In other words, despite getting out and missing the worst days, if an investor got the reinvestment timing wrong and missed just a few of the best trading days, returns could go from positive to negative very quickly.  Since none of us have a crystal ball, evidence suggests avoiding trying to time the market is a prudent path.  Per our mantra, “build a portfolio you can live with, and then live  with it.”

Ultimately, while markets may have ups and downs in the short term, investing for the long-term means adopting a strategy that suits your financial goals, staying focused on achieving those goals, and avoiding making hasty decisions based on short-term panic or the fear of missing out.

As always, feel free to contact us with any questions or to schedule an appointment.  At Henry Wealth Management, our manta is, “The First Thing We Earn is Trust.”  We’d like to initially, and then continually, earn yours.