Beginner’s Guide to Market Volatility

The S&P 500 is down 14% from its January high: 'Is this a sale, or the end of the world?' says CFP

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Key Points
  • On average, since 1980, the S&P has an average intra-year drawdown of 14%. In 35 of 42 years, the index has sported a positive return.
  • The average length of the five bear markets since 1980 is 434 days from peak to trough, including weekends and holidays.
  • Experts encourage long-term investors to buy into the market regularly rather than trying to time their trades.

Financial experts constantly urge investors to keep calm and stick to the plan when situations are volatile. But the idea that short-term news shouldn't affect your long-term plans can be difficult to stomach when so much of the news affecting markets feels, well, bad. Inflation is spiking. The Federal Reserve is hiking interest rates. The economy is slowing. War rages on Europe. And, oh yeah, that whole pandemic thing is still happening.

It's all added up to a tough year for investors so far. As of midday Thursday, the S&P 500 was down nearly 14% from its all-time high on January 3. The decline puts the broad stock market firmly in correction territory (defined as a 10% decline from recent highs) but still short of a bear market (generally, a sustained decline of 20% or more).

Market declines like this are scary. And your gut reaction may be to sell your stocks to avoid holding them should they fall further. But exiting the market means that you may not be able to take advantage should stocks eventually bounce back. And historically, they always have.

"When markets fall, you have to ask yourself, 'Is this a sale or the end of the world?'" says Leon LaBrecque, a certified financial planner and head of planning strategy at Sequoia Financial Group in Troy, Michigan. "So far, in our history, pullbacks have always been a sale."

Here are three numbers that can help put the next big market slide into context.

Market corrections happen about every 3 years

A sharp decline can feel jarring and sudden and unique, but zoom out, and you'll realize they happen regularly.

Since World War II, there have been 61 pullbacks (declines between 5% and 9.99%), 24 corrections (-10% to -19.99%), 13 bear markets (-20% or worse), according to data from CFRA. That means that, over that period, pullbacks occurred every 1.25 years (76/61), while corrections happened every 3.30 years (76/23) and bear markets materialized every 5.8 years.

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"Here in the Midwest, clients say, 'Oh my god, the market went down,' and I say, 'Yeah, and it's cold in winter," says LaBrecque. "There are drawdowns throughout the year every single year. The only way that wouldn't be true is if the worst trading day was on the first day of the year."

On average, since 1980, the S&P has an average intra-year drawdown of 14%. In 35 of 42 years, the index has sported a positive return. "If I told you that you could buy a house at a 14% discount, and then at the end of the year, it could be 10% up, would you do it?" says LaBrecque. "The answer is probably, 'Hell yeah.'"

Bear markets last 434 days, on average

Some market slides are longer and deeper than your typical downdraft. Bear markets can take a big bite out of your portfolio and see you spend longer than you might like staring down red numbers in your portfolio page. But they may not last as long as you think.

The average length of the five bear markets since 1980 is 434 days from peak to trough, according to data from Yardeni Research. That includes weekends and holidays. Watching your portfolio decline for more than a year may seem daunting, but over the course of your life as in an investor, it could be a blip.

Type "S&P 500" into Google and click "Max" on the chart. Now find the 1987 bear market, when stocks fell by a brutal 33% — nearly identical to the slide in early 2020. You may need to zoom in.

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Though past performance doesn't guarantee future results, for long-term investors, market pullbacks, even scary ones, have, historically, been temporary. And for opportunistic investors, they're a chance to buy investments at a discount.

When markets sputter, consider revisiting your portfolio and your watch list to see if an investment you like has gone on sale, suggests Peter Pallion, a CFP and founder of Master Plan Advisory in East Norwich, New York.

"If you liked [a particular stock] six months ago and you thought it was a viable company, take a look at the price now," he says. "If you liked it for, say, $300 a share, you should love it at $100."

70% of the market's top days occurred within 2 weeks of its worst days

Wait a second, you may be thinking. If holding onto my investments and waiting for the market to rebound is a good idea, wouldn't an investor be better off selling when things start to go down and buying when they head back up?

Of course. But predicting short-term movements in the market is next to impossible. If you sell your stocks hoping to avoid a rough day in the stock market, chances are you'll miss out on some all-important good days as well. Over a two-decade span examined by J.P Morgan, seven of the market's 10 top performing days occurred within two weeks of the biggest down days.

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Rather than trying to time the market, experts recommend employing a strategy known as dollar-cost averaging, in which you invest a set amount of money into your portfolio at regular intervals. Doing so aims to even out your cost of investing as you'll purchase more shares when prices are down and fewer when stocks are more expensive.

If you cash out in hopes of coming back in at exactly the right time, chances are, you'll miss the mark. And over the course of an investor's lifetime, even those with the worst possible timing could have prospered. Returning to 1987, had you invested in a fund tracking the S&P 500 in August of that year, just ahead of the market peak, and held until now, you would have earned an cumulative total return of more than 2,500%, according to data from DQYDJ.

The views expressed are generalized and may not be appropriate for all investors. Some countries and regions are experiencing security concerns, war, threats of war, aggression and/or conflict, terrorism, economic uncertainty, sanctions or the threat of sanctions, and/or systemic market dislocations. The uncertainties within the geo-political landscape may lead to increased short-term market volatility and may have adverse long-term effects on the U.S. and world economies, each of which may negatively impact current and future investment results. There is no guarantee that past performance will recur or result in a positive outcome. Carefully consider your financial situation, including investment objective, time horizon, risk tolerance, and fees prior to making any investment decisions. No level of diversification or asset allocation can ensure profits or guarantee against losses.

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