Volatility Is Normal

If you want to invest in the stock market, you’ll need to expect volatility and to be able to deal with it appropriately.

In 40 of the past 50 years, the stock market, as measured by the S&P 500 index, gained in value. In 18 of those years, it gained 20% or more — between 10% and 20% in 13 years, and between 0% and 10% in nine years. The other 10 years featured losses; in three of those years, the market lost more than 20%. Clearly, stock investors need to expect many ups and downs — with more ups than downs.

Here’s what that all amounts to over those 50 years: an average annual gain of 10.9%. That’s terrific, but it’s even more useful (and realistic) to adjust that for the effects of inflation, which brings it down to an annual average inflation-adjusted gain of 6.8%. If you’re investing in stocks and expecting to enjoy returns of 25% or more every year, you’re not likely to meet those expectations. But over long periods, if you invest meaningful sums regularly, you can amass a hefty nest egg. Your portfolio won’t necessarily average 10.9% growth — it might grow by more or less — perhaps, say, 7% to 12%.

Note that the market’s volatility is often expressed in points, not percentages. You’ll see, for example, a headline shrieking, “The Dow crashed 500 points today,” which can sound alarming. But since the Dow Jones Industrial Average was recently above 33,000, a 500-point drop would be just a 1.5% decline. Percentages give you a clearer picture. (Back when the Dow was at 2,500, a 500-point drop would have represented a much sharper fall of 20%.)

Most market corrections tend to last just a few months, and relatively few last more than a year. So expect drops in the market, and don’t panic. Instead, try to grab some shares of great companies when they’re on sale. And keep any short-term savings — money you may need in the next five or so years — out of stocks.