Stock Markets Volatility: Your Friend or Foe?

The Chinese economy has recently caused some worries which have negatively affected the world’s financial markets.  The volatility in our U.S. stock markets has increased substantially due to this situation.  But what most people should be worried about is how this volatility affects their portfolios and financial plans for the long term (NOT the short term).

For most people who are younger (in your 20s, 30s, 40s, and early 50s) or have at least 10 or more years to accumulate assets towards their goals, you probably have very little to worry about in regards to the latest financial turmoil.  In fact, it will probably give you an opportunity to buy some discounted investments, thereby helping your portfolio grow more down the line.  So be ready with any extra cash you may have to invest in bargains, and/or possibly sell off certain investments that may no longer make sense to hold in your portfolio.

For those closing in on and those already in retirement (in your mid-50s, 60s, and older) or those who have less than 10 years to accumulate assets towards their goals, you may be a bit more concerned about how this recent market turmoil may affect you (and understandably so).  However, let’s highlight some statistics that may make you re-think about worrying too much:

  • Market corrections are normal. In the U.S. markets we average a 10% correction ~ once a year and haven’t had one since 2011, so we were due for a pullback.
  • Bear markets have been shorter than bull markets historically. On average, bear markets last ~ 15 mos. and the average loss is ~ 32%.  Bull markets, on average, last ~ 4 ½ years with an average gain of ~ 130%.
  • Market movements are random in the short term and predictable in the long term. Try this exercise: For the next 15 business days (three weeks) try to predict where the markets are going to go the following day. To keep it simple, all you have to do is predict whether it will go up or down (you need not worry about how much). The chance of you getting all 15 days right is less than 1 in 33,000. To put this in perspective, you have a higher chance (1 in 9,000) that the Earth will be struck by a huge meteor during your lifetime.
  • Anticipate better days. The effects of corrections don’t last long.  After a drop of 10% to 20%, it typically takes just four months to break even.  Also, a severe bear market tends to be followed by a sharp bull market rebound.  Each time that stocks dropped 40%+, they rebounded by more than 33% during the first year of the comeback.

So what should you take away from these points?  If you can remain patient (and not panic) and put more money to work in quality investments after the markets pull back by more than 10%, and can maintain a long-term investment perspective, historically that has greatly helped investors reach their financial goals.  After all, we’ve all heard of the sayings, “buy low, sell high” and “buy on the dips” – unfortunately most investors do the exact opposite and that’s where they cost themselves.

Don’t be in that group that makes emotional investment decisions – now that you’re armed with this knowledge, take advantage of it and your financial situation as well…you’re welcome!

Find an experienced financial advisor who regularly advises clients to not panic during volatile markets, works for an RIA firm, earns his/her money from fees (NOT commissions), believes in having an abundance of investment choices for clients, and has the heart & demeanor of a teacher, NOT a salesman, and chances are you’ve found the right financial advisor to help you prepare and plan for your financial goals.

To learn more about Martin Federici, view his Paladin Registry profile.

Other posts from Martin Federici, Jr.