How to Stomach Stock Market Volatility
Question: What’s with all the recent gyrations in the stock market? It seems to move up and down a lot lately. I am a long-term investor. What should I be concerned about?
Answer: The recent upsurge of daily stock market volatility is simply a manifestation of an increase in uncertainty by investors, compounded by the attempts of some investors (e.g. hedge funds) to exploit these fluctuations in market price.
Economists and market watchers feel uncertain about the economy, inflation, deflation, dramatically lower oil prices, the stronger dollar and its effect on US exports, the lackluster growth in the housing market, and weak consumer spending which makes up over half of our Gross Domestic Product. They justifiably fear that if consumer spending slows down, GDP growth will surely follow. Stock buyers worry about when our six-year bull market might come to an end.
What does this volatility mean to you as a long-term investor? It means that the stock market is just doing what the stock market does and that you should ignore it. If you are one of those investors who tunes in to the market every day, it means you are paying too much attention to the wrong thing and you should redefine your perspective.
I like to show clients a chart that depicts the performance of stocks, bonds, and inflation over the past 80 years. The reaction is always the same. When you overlay a few weeks or months or even years of price movements on an 80-year chart, the perspective immediately changes and short-term gyrations become insignificant. Here is a similar chart, for example.
When you finish this exercise you will understand and be better able to ignore market volatility.
Don’t put yourself in the position of not being able to see “the forest for the trees.” If you pay close attention to what the market does every day, you won’t see the beauty of a good long-term investment policy.
Think of it this way. You are on a journey, and to get to you destination, you have to plan and follow an itinerary that includes a long ride in a car. Sometimes you hit traffic, sometimes you hit bumps in the road, once in a while you have to pull over because of stormy weather, and occasionally you travel in comfort on a wide open highway. You know that if you want to make it to your destination, you have to stick to your plan. Your investment portfolio is the vehicle that will carry you to a successful retirement. Expect stops and bumps along the way. But don’t panic and never quit.
Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment manager and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning. Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to firstname.lastname@example.org.