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Teach Me

Why Stock Market Volatility is the New Normal

January 07, 2019

Volatility is the tendency for markets to fluctuate up and down. And it’s a normal part of investing.

3 min read

What the heck has been going on with the market? Many financial experts say it’s the year that volatility returned to investing.

Stocks have been bouncing around like a ping pong ball for months. In the last week of December (2018) alone, the Dow Jones Industrial Average fell 650 points on Christmas Eve, one of it’s biggest single-day drops of the year. But then it rose nearly 1,100 points the following trading day. That was the biggest single-day increase in the history of the 123-year-old index.

More recently, news from iPhone maker Apple and a stronger than expected jobs report also caused lots of market turbulence.

Let’s talk about volatility, since there’s a good chance swings up and down are going to be the new normal for markets.

Quick recap: What’s market volatility?

Volatility is the tendency for markets to fluctuate up and down. And it’s a normal part of investing.

Have markets been this volatile before?

Yup.

It’s important to realize that the last ten years, where we’ve experienced fairly steady market gains each year, hasn’t been normal. We’ve been in the longest bull market since the one experienced in the decade after World War II. And at some point, that was likely to change.

Take a look at this chart of the S&P 500 from 1928 to 2018.

You can see just how much markets fluctuate over time. Some of this is related to severe economic events such as the Great Depression and the 2008 financial crisis.

But most of the variation is related to normal market conditions. Markets go up and down.

See Disclosure, Source: New York University, Stern School of Business

So why are markets volatile now?

There’s no one thing that’s causing volatility, but many. Here are some of the main causes:

What can you do about market volatility?

Try not to pay too much attention to the daily fluctuation of the market. If you do, it’s likely you’ll sell when prices go down, and buy when prices for investments go up.

You don’t want to invest according to your emotions. That’s what a lot of investors tend to do, and you’re likely to lose money that way, by locking in your short term losses.

Think of investing in the stock market like owning a house. You expect the value of your home to increase over time, but you don’t check its value every day, and you probably don’t consider selling if there’s a short-term drop in housing prices either.

Never mind the volatility, invest for the long-term

Invest for the long haul. It’s what we recommend as part of the Stash Way. If you invest regularly over the years, you’ll be buying stocks at a range of prices, both high and low. Over time, prices should average out.

Another way of thinking about this is that if you sell on days when the market is falling, you could easily miss out on days when the market rises soon after.

Having exposure to the market on these good days is very important if you want to maximize your portfolio’s potential for growth. Long-term success with investing is all about time in the market, not about market timing. Investing regularly over the long term, even with small amounts, is potentially the best way to maximize the growth of your money.

So stay calm, keep on Stashing.

By Stash Team

Disclosure: Past Performance is not indicative of future results. The rate of return on investments can vary widely over time, including the potential loss of principal. For example, the S&P 500® for the 10 years ending 1/1/2014, had an annual compounded rate of return of 8.06%, including reinvestment of dividends (source: www.standardandpoors.com). Since 1970, the highest 12-month return was 61% (June 1982 through June 1983). The lowest 12-month return was -43% (March 2008 to March 2009). The S&P 500® is an index of 500 stocks seen as a leading indicator of U.S. equities and a reflection of the performance of the large cap universe, made up of companies selected by economists. The S&P 500 is a market value weighted index and one of the common benchmarks for the U.S. stock market.
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