Last March the U.S. stock market recorded some of the most volatile days in its history. There were some scary days for investors as the U.S. economy closed. As historic as the volatility was, it was not completely unexpected. Investing involves risk - sometimes extreme short-term risk. At inflection points markets can be erratic but over time the volatility smooths out, valuations start to make sense, and investors gain comfort.
With March 2020 in our rear-view mirror, it is important to remember the lessons we learned - lessons that will be repeated. As dire as everything might have felt in 2020, the world did not end. One year later the stock market has soared to new highs - highs that would have been unimaginable to our March 2020 selves. Volatility subsided and brought a period of unexpected (at the time) calm in markets. As unnatural as the volatility in 2020 felt, the recent calm in markets feels similarly unnatural. Where is the downside risk?
Speculation on the Rise
The unfolding collapse of Archegos Capital Management, the family office for former hedge fund manager Bill Hwang, is a good reminder that excessive risk taking - with leverage - can lead to problems. In January it was Melvin Capital Management with GameStop, now it is Archegos with ViacomCBS and Discovery. Investors are trying to maximize returns but have forgotten the golden rule - volatility can strike at any time. In the absence of downside volatility over the past year, speculation is on the rise.
A Return to History
Could historic volatility happen again? Absolutely, and it will happen again. We don't know when and we don't know why, but markets are volatile - extremely volatile - at times. Investors accept volatility for the golden pot at the end of the road - long-term gains. Volatility is merely the tradeoff we make for long-term gains.
Since extreme volatility is a part of investing it should be on our minds. However, the more likely outcome is a bit less dire. On average markets experience a 5% decline every 3-4 months, a 10% decline every 11 months, and a bear market (20% decline) every 3.5 years. While it's not clockwork (these are averages after all), U.S. stock markets haven't had a 10% decline since the 34% pullback in February/March 2020. This doesn't mean a correction is right around the corner, but it does mean we would not be surprised if one occurred along the path to future growth. One last stat: the average bull market experiences roughly four corrections throughout its life. This means only a quarter of 10% declines lead to a bear market. Corrections are not something to be afraid of, they are something to embrace.
We know volatility is normal and we know markets have been calm for a while. Therefore, we know volatility will increase eventually. When it does, are you ready? We have built your portfolio to withstand volatile periods because we know they occur. However, controlling emotions is equally as important - and sometimes harder to do. The truth is, when it seems hardest to stick with the plan, it is usually the time when it is most important that you do. We have prepared your portfolio. Are you prepared too? Keep emotions at bay and trust your long-term plan.
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Benjamin W. Jones, CFP®, AIF®
CERTIFIED FINANCIAL PLANNER™
President, Chief Investment Officer, Principal
240 South Pineapple Avenue, Suite 200
Sarasota, Florida 34236
Telephone (941) 365-3745
Toll Free (800) 926-5237
Advisory Services offered through Allegiant Private Advisors, LLC, a Registered Investment Adviser