Remember the good old days? 2017 was marked by the absence of market swings, resulting in a steady climb (positive returns for every month) without a single day when the S&P 500 moved 2% or more. If you go back and reread our quarterly commentary from last year (because, why wouldn’t you save them? ;)), you’ll note a consistent theme along the lines of “this is nice, but it won’t last.” That is about as far out on a limb as we will go with prognostication – to point out that the future will likely not be free of challenges (investment or otherwise).
Low and behold, volatility is clearly back. 2018 has seen 16 days with moves of 2% or more, and five days with movements of greater than 3%. It certainly makes the investment experience less comfortable, but it’s also the nature of the game. Capturing the long-term returns from stocks requires tolerating some uneasiness along the way.
While big daily market moves are unsettling, they just don’t give us any important signals for the future. According to research by The Vanguard Group, nine of the worst 20 trading days for the stock market since 1979 have occurred in years with positive annual returns. Bad days do not portend bad years. Conversely, twelve of the 20 best trading days occurred in years with negative annual returns. Short-term movements are simply not an indicator for what lies ahead for the market.
As always, the key to long-term success is to stick with the game plan of a diversified portfolio. An important step in the planning process is setting an appropriate asset allocation, and part of that process is acknowledging that stock volatility is an unavoidable part of the investment experience. Bonds may have seemed unusually staid and boring last year, but this year they are providing stability when needed. That is why we have always advocated for diversification, and why it works for clients over time.