Beginner’s Guide to Market Volatility

'You're investors, not traders': How to keep perspective when the market drops

Twenty/20

Notable market drops have dominated recent headlines. But experts suggest you leave the obsessing about the day-to-day movements in the stock market to the pros, and instead focus on the long-term merits of investing.

The sharpness of daily moves in recent weeks has been unusual. In a 10-day span through Friday, the S&P 500 has lurched higher or lower by at least 3% on six different trading days. And by midafternoon Monday, the major indexes were down more than 7%, off news of the coronavirus and sinking oil prices. By comparison, moves of this magnitude historically have happened about four days a year, on average, since 1980, according to FactSet data analyzed by Grow.

Keeping a long-term perspective can help. When Jeff Zipper, managing director of investments at U.S. Bank Private Wealth Management, talks with clients, he'll show them a chart of the market's performance over the span of several decades — which shows that the market always has rebounded and gone up.

"There are different sorts of economic or macro events that would cause a little blip over the longer term," Zipper says. "And for long-term investors, there are a few things you need to keep in mind: Diversification, your time frame, and that you're investors, not traders."

In other words, while traders focus on the day-to-day, investors aim to build wealth over the long term by buying and holding a diversified portfolio. 

Here's how to keep perspective.

Volatility is the market's way of digesting economic news

When you hear about volatility in the stock market, it often seems to refer only to declines. In fact, big swings in the market often see benchmarks like the S&P 500 or the Dow Jones Industrial Average moving up and down more than average in quick succession. That's because traders try to sort out the potential impact of whatever news is causing volatility in the first place.

"The back and forth volatility [of last week] confirms that we are trying to figure out what [the coronavirus] really means to the U.S. economic expansion and the rest of the global economy," says Keith Buchanan, a portfolio manager at Globalt. "You kind of don't know what to expect when you wake up."

VIDEO2:1702:17
Why you shouldn't panic when markets are bumpy

Video by Stephen Parkhurst

Sharp swings like this often happen during bear markets, defined as periods when broad market gauges tumble more than 20% from recent highs, like the last three such ones in 2007-2009, 2000-2002, and 1987. But outside of those market events, other recent periods have been equally as dramatic, including:

  • August 2015. In a four day period, the S&P 500 logged three moves in excess of 3%, with two down and one up. Slower economic growth in China, along with a so-called flash crash, were behind these moves.
  • August 2011. In a 14-day span, the S&P 500 fell by at least 4% on four different days and rose more than 3% on three days. The European sovereign debt crisis was the market shock at this time. 
  • August-September 1998. In eight days, this benchmark fluctuated between losses of as much as 6.8% and gains of as much as 5.1%. To blame at the time were fears about a global economic rout. 

Take the long view: 'Use this as more of an opportunity'

Rather than letting this latest bout of volatility rattle you, it's better to focus on your long-term investing plan, recommends Zipper. "Stay with your plan and use this as more of an opportunity."

It can be "very difficult" to appreciate that when the market becomes less calm, that's actually good because it allows long-term investors to buy at lower prices, Zipper says. However, history shows that when Wall Street is as fearful as it is now, it's actually a "good entry point" for investing.

If you are worried about your portfolio, you can make sure you diversify by investing in assets other than U.S. stocks — like bonds, commodities, or exchange-traded funds (ETFs) that track indexes in other parts of the world

Finally, if you're looking for other guidance to help navigate market turbulence, check out our roundup of expert advice.

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