Volatility is an embedded piece that come along with investing in a market. The stock market is perhaps the most known market where volatility shows up, but real estate, commodities and currency markets are other examples where it occurs. To stay calm and sane during turbulent market times a shift in mindset where we think long term is needed.
Volatility often occurs due to economic factors,political factors and could even happen when nature throws tsunamis or hurricanes at us.
A few recent major events that caused big temporary drops in the markets were the 9/11 attacks, the financial crisis of 2008 and lately Brexit. Each of the events causes different market reactions but they all caused a temporary decline in the market.
Individually these types of events could easily cause panic and let people to move their assets to less volatile safer type of vehicles or perhaps even transfer their money completely out of the stock market.
When investors observe a great decline within their portfolio it can often cause their short term rational to take over and can cause them to make decisions based only on how the market looks at that very moment. They often forget about the goal of the portfolio and forget about their own personal long-term goal.
There are countless theories and opinions around how to proper invest a portfolio, but it is very safe to say that no one truly knows how the market will do 1 trading day from today and it is reasonable to say that it can be very difficult yet maybe impossible to predict what the market will do over the next 2, 3 and 5 years.
What we do know through history is that staying invested for the long term is profitable and also that markets have always recovered from its dips and crashes. The 2008 market crash triggered a lot of people to move their money out of the stock market. As of today (09/25/2018) the market has more than recovered from that crash and the ones who decided to take their portfolio out of the market have missed out on large gains since then.
A similar scenario occurred in the markets around the 9/11 attacks and when the Brexit turmoil was going on. These events caused the market to drop but they were both short lived.
Past events obviously does not give us a 100% assurance that we can predict what will happen next time when the market decides to correct itself, but itdoes show us how staying invested with a long-term mind set can be very beneficial.
When being invested keep in mind that crashes will happen but also remind yourself that the fear around the crash is more likely worse than the crash itself. And understand that if you are waiting for certainty in the market you possibly will never be an investor in the market.
Below is some statistics around ups and downs in the market.
*The S&P 500 has had 3 separate 20-29% calendar year drops since 1926, and 3 separate over 30% calendar year drops since 1926.
S&P 500: 1926-2017 (92 Periods)
Roughly 74% of the years the market was up
68 years the market has been up and 24 years it has been down during that period
Indices mentioned are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results. Investing involves risk. Depending on the types ofin vestments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal.