A playbook for market Volatility

Much has been written on the drivers of this years market volatility. But how does one navigate this market volatility? As J.P. Morgan writes in this week’s highlight article in link button below, there are several key principles to bear in mind:

  • Volatility is normal. Pullbacks happen. On average, the market suffers a double digit decline every year. Equities compensate investors with attractive long-term returns for seeing through volatility.

  • Diversification supports portfolios by delivering better risk-adjusted returns (diversified portfolios are not down as much as the equity markets).

  • It’s about time in the markets... Being invested in the equity market for any one calendar year since 1950 could have yielded a 47% return or a -39% return. Longer-term, the outcomes are compressed and skew positive. Add in a diversification - a 50/50 diversified stock/bond portfolio has not experience a period of negative returns over the rolling 5, 10, or 20-year calendar periods since 1950.

  • …Not timing the markets. Investors are often tempted get out when markets get choppy. However, if an investor were to miss the 10 best days in the market rather than staying fully invested, they would have cut their return in half from 9.5% to 5.3% annualized over the last 20 years

  • Stay invested when things feel the worst – as the return potential is often at it’s greatest. A majority of the money that investors can make happens within a bear market – they just don’t realize it at the time.

S&P 500 Intra-Year Declines vs. Calendar Year Returns

This chart shows the maximum intra-year equity market drawdowns since 1980. Despite average intra-year declines of 14.3%, the S&P 500 has managed to deliver positive returns in 31 of the last 41 calendar years. Despite multiple wars, recessions, pandemics, and crises, the S&P 500 has never failed to regain a prior peak— and then surpass it.

 

What Else We’re Reading

 

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