Fisher Investments Reviews Stock Market Volatility

Negative Market Volatility is Scary, but Normal

Downside volatility, of any kind, is one of the toughest things investors have to go through. However, market volatility is a fact of life for equity investors. As Fisher Investments shared in our 10/26/2023 commentary, “Corrections Call for Calm,” stocks can fluctuate for any reason or for no reason, particularly over short time periods. Investors like Mary often associate volatility with risk, loss, or negativity. However, volatility is both positive and negative; stock prices can move up as quickly as they move down.

The chart below shows how many times the stock market rose or fell more than 1% during a single trading day. The dark bars represent positive moves and light bars reflect negative moves.

Source: FactSet, as of 3/23/2023. Total number of +/-1% moves in the MSCI World Price Index, daily, 1/1/2002 – 12/31/2022. Presented in local currency.

While there is nothing inherently significant about a 1% change during a single trading day, we use this threshold because it is relatively infrequent and, for many investors, a 1% move feels substantial. For example, let’s assume Mary’s retirement portfolio was valued at $1 million at the beginning of the day. If the market moves 1%, up or down, her account would gain or lose $10,000 in a single day—a significant change for most people!

The important takeaway is that higher or lower volatility is never permanent and, importantly, doesn’t tell you which direction stocks go next. When negative volatility strikes, understandably, investors can be tempted to deviate from an established long-term plan by seeking an investment strategy with lower volatility until “things calm down”. However, history shows that successfully and repeatedly timing market exit and reentry points around short-term negative volatility is impossible and runs the risk of missing out on the good kind of volatility when markets bounce back—potentially jeopardizing your ability to reach your long-term goals.

As the weeks passed, the stock market recovered much of what it had lost in the previous few months. Mary’s sense of uneasiness slowly began to abate, but she was still obsessively checking her account balance. She watched her retirement funds rise again and close in on their previous high point. The knots in Mary’s stomach began to ease.

Then, negative volatility reared its head again.

Renewed Volatility Near Breakeven Points Is Common

As Mary experienced, negative volatility arising as markets near full recovery from a bear market—a prolonged decline of more than 20%—can unnerve some investors and seemingly confirm fears that the rally is unsustainable. However, it’s common for stocks to wobble as they approach their prior peak.

For example, US stocks recaptured their pre-financial crisis high on April 2, 2012 (on a total-return basis). The very next day, US stocks proceeded to decline 9.6% over the next two months. But then they roared higher, returning 49.7% between June 1, 2012 and the end of 2013.* Similarly, in 2020 (shown in the chart below), US stocks experienced a 7.1% decline before reaching their previous high point, then a 9.5% pullback after. Yet, stocks went on to rally 49.2% through the end of 2021.

Source: FactSet as of 8/23/2023. S&P 500 Total Return Index, 2/19/2020 – 12/31/2021.

This doesn’t mean volatility around breakeven points is a given. Pullbacks can strike at any time, for any or no reason. Though scary in the moment, pullbacks can be healthy for markets. They open the door for positive economic surprises by helping constrain sentiment and keeping expectations low. Markets tend to move most on surprises, so a healthy gap between low investor expectations and modestly better-than-expected reality is often a bullish feature.

Enough, Mary thought. I’m getting out of the stock market!

Her retirement account balance was—finally—almost at the level it had been when she’d retired about eight months ago. While her retirement nest egg was back near its high point, Mary’s nerves were shattered.

Now 68 years old, Mary desperately wanted a stretch of calm in her financial life. She was supposed to be relaxed and happy in retirement, she thought. Instead, she was exhausted from habitually watching the financial news, checking her account balance, and worrying about running out of money in retirement.

Mary wondered if selling her stock holdings and waiting until markets felt calmer would bring her some peace of mind. What’s the worst that she’d be missing?

Getting Out of the Market May Mean Falling Behind on Your Financial Goals

While exiting stocks amid volatility may provide emotional relief, inadvertently missing the best days in the market can drastically reduce your portfolio’s growth over your investment time horizon.

As the following chart shows, even if you only missed the 10 best trading days over a 30-year period, your cumulative investment returns would have been cut by more than half. And those best days tend to occur during the scariest times. All ten of the best market days occurred during bear market years (2008, 2009 and 2020)—highlighting the danger of making fear-based investment decisions during market downturns. For long-term, growth-oriented investors, time in the market matters a whole lot more than timing the market.

Source: FactSet, as of 9/20/2023. S&P 500 Total Return Index from 1/4/1988 to 12/30/2022.

Enduring Market Volatility Is Difficult, but Possible

Being a stock investor and learning to be comfortable with market volatility can be difficult because we’re wired to seek comfort when things get uncomfortable. It’s possible, but it takes time and practice.

So, what are some things Mary can do to help her cope with market volatility?

First, she needs a sound, long-term financial plan that addresses her unique needs. Once the right plan is in place, finding ways to keep a long-term perspective is critical. Tuning out the daily financial news is one way to increase peace of mind. In their push for more clicks, media outlets often create content that intentionally spurs fear and anxiety.

It’s important to stay informed through a balanced dose of news, but as Fisher Investments’ Executive Chairman and Co-Chief Investment Officer, Ken Fisher, shares in his commentary—"Fisher Investments’ Founder, Ken Fisher, Reviews The Role the Media Plays in Markets”—staying tuned in to today’s 24/7 media cycle isn’t always productive. Maximizing your golden years is a lifelong journey that requires patience and discipline, and understanding that market swings will be a constant. Some things that might help you along the way include spending more time with loved ones, regular physical activity, perfecting your favorite hobbies or learning new ones, and seeking new experiences. Working with the right financial adviser to help you stay focused and tune out the daily noise can be a productive partnership in your financial journey.

*Source: Factset as of 10/27/2023. S&P 500 Total Return 10/9/2007-12/31/2013