I was talking with a client recently. She was expressing some concern for her investment accounts based on a recent article she read in the New York Times. We talked through some scenarios with regards to how this might affect her investments and long term plans. Although we walked away with the realization that there were not any major changes to her investment plan needed, we did realize something else. Volatility is back.
As a Financial Advisor, I realize that the market has not been bumpy for the last couple years. But as a former Engineer, I decide to go to the data. I wanted to look at volatility of the S&P 500 since the bottom of the previous bear market in 2001-2002 through the bear market of 2008-9 and until now. The bottom of that first bear market occurred on October 9, 2002 with the S&P at 777.8 (all data from Yahoo Finance; closing S&P daily prices). I quantified the number of days the market moved more that 1%. This is my simple proxy for daily volatility.
Here are a couple of fun facts:
2014: 14% (thru Oct 17, 2014)
That is a pretty good run of decreasing volatility.
I thought this was a good reminder not to get complacent. The last couple of years have been fun. And calm. But the stock market is not normally so calm. An increase in volatility at this point would be totally consistent with history. Given the Federal Reserve is starting to unwind its historical stimulus, I think we should at least expect normal levels of volatility.
Things certainly aren’t going to get easier for us if markets get bumpier from here. And it will be that much tougher because we have become used to the cushy ride. Remember, volatility doesn’t necessarily mean losses. 2009 was a pretty volatile year, but the S&P returned 26.5%.
The best remedy for volatility is to maintain a well-diversified portfolio, stick to your investment strategy and re-balance annually. This is the strategy that we pursue for you at Bootstrap Capital.
Buckle your seatbelts: the bumps are back.
Note: The contents of this site are general in nature and not intended as specific investment advice. All investments are subject to risk; including loss of investment value. If you have any question regarding investments or concepts in these pages, please consult with an investment professional.