Monday, March 9 is the sixth anniversary of the S&P 500 hitting bottom after dropping over 57% from peak-to-trough over the previous 17 months. In other words, from October 2007 to March 2009 the market dropped 57% and then for no reason anyone can identify and at a time no one expected the fall ended. Just like that, it was over. On that day, the S&P 500 closed at 676.53. The very next day, it was up 6.4%. At the end of February this year, the S&P 500 closed at 2,104.50, up 211% from the March 2009 low.
From the chart above, we see that the average percentage drop was -32% and the average duration was 15 months, ranging from 1.5 months to 36.5 months. Volatility is a word analysts throw out frequently when markets gyrate sharply over a short period of time. One day it’s sheer ecstasy and the next day it feels like despair. If you had panicked out of the market sometime between October 2007 and March 2009, you have missed one of the greatest market runs of all time. This is not to suggest that there haven’t been some agonizing episodes of volatility along the way.
Since the stock market’s bottom in March of 2009, there have been only 3 corrections: In the spring of 2010 the S&P 500 began a 69-day drop of roughly 16%. The widely referenced summer correction of 2011 lasted for about 154 days and almost became a bear market. The Dow dropped roughly 16%. The S&P 500 actually dropped a hair over 20% before snapping back. The correction during the spring of 2012 set up one of the greatest rallies of all time, although it was barely a real correction, sporting a peak-to-trough drop of just 9.9% in just under 60 days.
Markets can and do fluctuate sharply from time to time. While investing cannot eliminate risk, it can be managed with proper portfolio techniques.
Even though the long-term annual average return for the S&P 500 is 9.6%, there have only been 5 calendar years (about 6% of the time) that it ended with a return of 7% to 12%. Average numbers are nice in theory but rarely play out so neatly in reality. That’s why volatility shouldn’t be the only way you think about risk in your portfolio. It can help you determine your risk tolerance, but it’s not an exact figure for measuring all of the risks in your portfolio.
You should be more concerned with risk management than risk measurement. Forms of risk management include diversification, periodically rebalancing your portfolio and having a long-term asset allocation plan in place that fits within your specific risk profile and time horizon.
The biggest risk you face as an individual investor is running out of money after you retire. These are your real risks, not movements up or down in the markets. Look at volatility as a source of opportunity, not something to be afraid of.
What does all of this mean?
With market volatility, it’s the advance which is permanent; the declines are temporary. There have been thirteen bear markets since the end of WWII, roughly every five to six years on average. Thus, over a 30-year retirement, you will have to weather about five or six bear markets. The key point is that to try to time a bear market is to insure that you will end up worse off than if you had just stayed the course.
The one thing our experience in the industry has taught us: few can accurately predict where the economy will be in one year, and even fewer can accurately call the peaks and valleys in stocks. Our favorite quote comes from baseball legend Casey Stengel, “Never make predictions, especially about the future.” It’s one reason why we talk so much about diversification and the longer-term.
We hope you’ve found this review to be educational and helpful. Let me emphasize, it is our job to assist you! If you have any questions or would like to discuss any matters, please feel free to give us a call.
As always, we are honored and humbled that you have given us the opportunity to serve as your financial advisor.