Don’t Let Market Tranquility Fool You…

The U.S. stock markets have been relatively calm over the past few years when viewed on a day-to-day basis.  On most days, the net change in the market measures such as the Standard & Poor’s 500 or the Dow Jones average has been 1% or less.  Investors must keep in mind that such lack of volatility is the exception rather than the norm.  Complacency can cause people to “over-allocate” to equities and underinvest in bonds, believing they don’t need as much exposure to the stabilizing effects of fixed income securities.

But, just how “bumpy” can the stock market ride become?  On September 29, 2008 the S & P 500 declined 8.79%.  October 9 and October 15 of that same year saw losses of 7.62% and 9.04% respectively.  December of 2008 opened with a loss of 6.93% on its first day. But, volatility can have an upside as well.  October 13, 2008 turned in a gain of 11.58% and on October 28, 2008, the S & P 500 saw an increase of 10.79%.  Indeed, things have been much calmer during the current bull market which began in March of 2009!!

So, stock market investors need to “develop the stomach” to tolerate such volatility without panicking.  After all, the worst thing one can do is to abandon their long-term plan by selling at a market bottom.  Rather, stock market participants need to understand their own temperament and avoid an over-commitment to equities.  Many people find that translating % changes into actual dollars can be helpful.  Perhaps it’s easier for us to assess our possible reaction when faced with an $8,790 one day loss (Sept 28, 2008) on a $100,000 S & P 500 mutual fund holding.  Likewise, it helps to remember that the same $100,000 investment into such a mutual fund has the potential to produce a one day gain of $11,580 (October 28, 2008).