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The Corrective for Volatility in Investments? Think long-term!

Authored by: Jeff Englin, FCMM Manager of Advisory Services
Date: May 6, 2020
Seeking long term growth is INVESTING. Focusing on short-term tactics is TRADING.

Markets have always moved up and down, with those movements measured as “volatility”. Most of us have heard the age-old advice for investing: “Buy low; Sell high”. While that adage may be accurate in its simplicity, it’s a mistake for most of us to pursue it as our big aim.

First let’s take a look at root of the concept – timing. “Timing” encourages the mindset of trying to guess when a particular type of investment is at a “low” when you are trying to buy-in/purchase. And then it creates a sense of alertness to watch for the “right time” to sell. While this is perfectly correct mathematically and logically, it feeds the emotional knee-jerk reactions of being confident when a market or stock has been or is doing well (when in reality it might be at a “high” point), and causes anxieties and concerns which may drive one to sell when the stock/mutual fund is doing poorly (when it is more than likely at the “low”), thinking I better get out before I lose any more! So, yes; our heart tells us exactly the opposite of what our brain knows we should do.

Another issue with the adage is that also encourages people to “watch” and analyze their investments more often than is helpful. I’m not saying that keeping in touch with what is happening in the markets is bad. But for many folks, it’s usually better to have a once or twice a year review of your plan – with a three- to five-year or longer focus and then leave it alone. Go back to focusing on your daily life – the family, work, and your hobbies. Don’t worry about the day-to-day drama that goes on within the bond and (especially) the stock markets. Quite frankly, the day-to-day stuff doesn’t really matter. Whether you are retiring next year, in five years, or in 25 years. The fact is that what happened yesterday or today are merely blips on the overall screen. One dramatic example: October 19, 1987, also known as “Black Monday”. Stock markets around the globe crashed, starting in Hong Kong, spreading through Europe, then hitting the US. The Dow Jones Industrial Average (DJIA, which at the time was considered the best indicator of what was happening in the overall US economy) dropped 508 points or 22.6%! One day! …ouch. However, for those who didn’t panic (or maybe weren’t paying attention) and stayed in their positions (didn’t sell), the crazy drop that October was pretty much completely recovered by the end of that same year, just a few months later.

Generally, those who didn’t focus only on the immediate issues at hand like short-term traders but who looked at their accounts over a longer horizon ended up being just fine. Most of them didn’t panic (sell); they maintained the shares they owned. And those shares eventually recovered their previous values. In fact, those investors were then handsomely rewarded as we slid in to the “go-go” years of the ‘90’s, a decade of fantastic growth. But those who had let their short-term concerns and anxieties rule found themselves selling out of positions (at lows), then standing on the sidelines not only missing out on the recovery of their positions, but typically not comfortable getting back in to the markets until they had seen some significant growth, finally feeling confident enough to buy back in (after significant gains had been missed).

As I mentioned, that drop in 1987 was one of the most dramatic market crash/correction/pull-backs. Most downturns (which have cyclically occurred throughout civilized history) happen and span a timeframe of anywhere from two to five years, the longest being the Great Depression (1929-1939). Market drops occur from time to time … and will continue to do so. We obviously just had (or are still going through) another. This last one contained some great examples of over-reaction selling/buying.

There is a lot of media excitement being put out over things like the “largest one day drop in the history of the stock market” and suggesting that the worst might be over so investors need to now “buy in” while it’s “cheap”.

Sorry for the annoying quotation marks, but a lot of that is because there is so much relativity cooked into what’s being said. Within the first quarter of this year, we did have a day that had a 1,191 point drop in the Dow Jones Industrial Average (DJIA). That equated to a -4.4% drop. Big, but the market volume has never been this big either. As well, though, the number of people IN the stock market – specifically with access to go into their brokerage account and buy/sell at a moment’s notice, has also never been higher. The market moves on emotion and sentiment: People either buy or sell when they think or feel the market (our US economy) is either going to go up or go down. If they see bad news, they sell. Typically the math or statistical data comes later, especially for the average investor! That’s why most massive market moves, especially the ones that happen in a single trading day, get countered quickly after people calm down a bit or think about what they’ve done. We had four huge one day drops in the DJIA in just the last few weeks of Feb and in early March of this year: Feb 27, -4.42% (biggest one day drop ever up to that date); Feb 24 -3.56%; Mar 3 -3.58%; and Feb 25 -3.15%. All the while, during that same period of time, we’ve experienced two of the largest one day point gains as well (funny how those days didn’t make the news headlines!): Mar 2 +5.09% (biggest one day ever to that date), and Mar 4 +4.53% (second biggest day ever to that point). And we had a few more days that were even bigger movements than that since then. (The two biggest: March 16 DJIA lost -2,997 points or nearly 13%, the worst percentage and point drop since 1987; and then on March 24 the Dow gained +2,117, the largest one day points gain to date). These movements highlight both how crazy volatile the market can swing around, and how fast it can occur in today’s “e” environment. And yet, to put this all in perspective, in the last “crash” or major correction we’ve seen prior to this (2008), the DJIA dropped 20%. The Standard & Poor’s (S&P) crashed to the tune of 38%. Both the DJIA & S&P are indexes, which is a list of stocks that each index provider feels best represents what the US market is doing as a whole. The DJIA list is comprised of 30 of the largest companies; the S&P 500 tracks 500 US companies (large, but not necessarily the largest) that S&P has researched and thinks best reflects the “average” of what’s going on in corporate America and our economy. I personally like to watch the S&P because it has more companyies involved, but all-in-all they generally move up and down together.

There will be more periods of volatility in the future. I don’t know when, or how long they’ll last. Rather than concentrating on the current market value of your long-term investments, I encourage people to focus on the number of shares they own while they’re investing.

Which brings me to my final point. During your working years, invest all you can (i.e. acquire as many shares as you can). When you buy “shares” of an investment, the value of our account depends on the number of shares you own times the value of those shares …that day. If you aren’t selling today, it doesn’t matter what the price (or overall value) is today, the overall value is only important if you are selling out of the position. I’m not referring to money needed in the short-term; that money should be in a conservative investment away from the volatility discussed above. But what should be in the stock market is “long-term” funds, money we don’t need to withdraw from for seven or more years. Market history has shown us that patience in steady investing will best serve us with long-term growth.

And for the plot-twist at the end: Those who are investing during a market downturn can have the satisfaction of two things: (1) We haven’t lost any of the shares we previously purchased, and (2) the new money that’s going in is buying more of those shares at lower prices! When the price per share recovers, we’ll not only have the same value as before, but we’ll be money ahead for all those shares we bought “on sale”.