The opposite of tranquility is volatility. People are not alarmed when equity markets are volatile to the upside. When the markets turn south, however, investors flee from their serenity. The key to understanding volatility is understanding it is both the upside and the downside.
This concept probably won't surprise you if you watch the markets daily; you shouldn't, by the way, but my profession requires me to do so. According to Bloomberg, three of the most significant drops in the S&P500 occurred during March of this year. Watching more than 12% of the S&P500 evaporate in minutes will take the breath out of almost anyone. The emotional difference between the individual investor and the professional investor is nil. The discipline between the two is a much different story. The professional investor is responsible for their net worth and many other families. They are aware of this shocking fact: although the market saw three brutal days in March, it also saw two of the best market performing days in the last 50 years.
There is little that can be shared that can soothe the fear of market volatility. However, ignorance is not bliss by any means, and there are no innocent bystanders. If you have a 401(k), IRA, or even a family brokerage account, either you or a professional you have hired are responsible for making changes as necessary.
The worst decisions manifest from fear and emotional reactions, while the best decisions come from planned responses to possible occurrences. Our hearts go out to individuals managing this volatility on their own. We hear the stories of painful reactions made at the absolute worst time. But think about this: a market can only be down 12% in a day if people sold at that price. They were active participants in what became the fastest bear market in history, followed by the steepest bounce in history. Retirements weren't jeopardized that day over market moves. They were put at risk by emotional reactions.
The bad news about market volatility of this magnitude is that history says we will have it around for a while. According to Macro Charts, the first 76 trading days of 2020 witnessed stocks moving more than 1% per day 42 different times. That puts 2020 on track for the sixth most volatile year in history. Per Macro's research, all of the most volatile years reached well over 100 days of this kind of volatility. The average was 129 days indicating we have more to go.
Do not let fear consume you, but don't close both eyes either. The virus changed how you are living today – it certainly changed my life – and it changed the economy more than just temporarily. If you are managing your money on your own, you cannot abdicate your responsibility and hope it all works out. Write out your discipline and stick to it. Ask yourself: why do I own this investment today? What has changed that requires action?
Disclaimer: Joseph Clark is a Certified Financial Planner™ and the Managing Partner of Financial Enhancement Group, LLC an SEC Registered Investment Advisor. He is the host of “Consider This” found on WIBC Saturday mornings from 6-7a.m. as well as three other Indiana-based radio stations. Joe has served as an Adjunct Assistant Professor at Purdue University where he taught the capstone course for a degree in Financial Counseling and Planning.
Financial Enhancement Group is an SEC Registered Investment Advisor. Securities offered through World Equity Group, Inc., Member FINRA/SIPC, and a Registered Investment Advisor. Investment Advisory services offered through Financial Enhancement Group (FEG) or World Equity Group. FEG is not owned or controlled by World Equity Group.
Joseph Clark and World Equity Group, Inc. do not provide tax or legal advice. For tax advice consult with a qualified tax professional. For legal advice consult with an attorney