Keep Volatility In Perspective.
“There are many kinds of risks.. But volatility may be the least relevant of them all.”
– howard marks
By Shawn Perkins | Investing
3 minute read
The S&P 500 and Nasdaq reached all-time highs in July. The S&P reached 5,667 on July 15th and the Nasdaq reached 18,647 on July 10th.
Since then, we have had a decent amount of not-so-great news. On the economic side of things, jobs data released last week showed a slowdown in hiring and a slight uptick in unemployment in July. This fueled some concern that the Federal Reserve may be behind the ball on cutting interest rates. On top of that, some of the big technology stocks experienced sharp losses as the hype around artificial intelligence lost some of its momentum. Meanwhile, Warren Buffet reduced his stake in some of his long-time holdings in Apple and Bank of America. Prompting the speculation that his Berkshire Hathaway is preparing for a downturn by hoarding cash.
As a result, the technology heavy S&P and Nasdaq dropped, with the Nasdaq entering correction territory (a correction is a term used to describe when an index has dropped more than 10% from it’s high).
Markets like these generate a lot of noise.
People love to talk about the doomsday scenario in the markets. And they love to tell you what to do about it. This morning I saw someone on social media advocating for putting all your money into gold coins to prepare to use it as currency.
First. No.
Second, if an environment like that came to pass, I think we would have much bigger things to worry about than what I’m going to buy with my buried treasure in the back yard.
It’s easy to get rattled by the market when looking at it in a short time frame. But let’s not forget that even after the recent drop, the S&P and Nasdaq are still up over 10% and 9%, respectively, for 2024.
While there is still a lot of time between now and the end of the year for the market to change direction, these are solid returns if you consider that the S&P’s average nominal (before inflation) rate of return for the past 50 years is just over 11%. (TradeThatSwing)
Volatility is normal. It is not uncommon for the market to experience a 5-10% drawdown in any given year.
What isn’t normal, is how non-volatile the market has been this year.
This chart from Sherwood News from July 17th shows how tame the market has been compared to recent years. The dispersion of returns has been concentrated within plus or minus 2% so far this year. That of course has now changed over the past few days but is still not out of the ordinary when you look at 2020-2023.
So, what do you do about all of this?
Most of the time, nothing. The worst thing you can do is react to sharp drawdowns. The right approach is to be proactive and position for when, not if, the market drops.
That isn’t the answer that most people want to hear, but it’s the right one.
The key to successfully constructing and maintaining a portfolio is planning for when you’ll need to use your funds and being prepared for the inevitable downturns in the market.
Keep the short term needs safe and take responsible risk to grow for your future needs.
This will make you a much better investor in the long run.