Julie Jason: How to view a volatile market.
We’ve seen a lot of volatility lately.
We are still in a bull market that started in March of 2009, according to Sam Stovall, chief investment strategist of CFRA. But we’re awfully close to turning into bear territory. A bear is measured by CFRA as a 20 percent decline from a peak to a trough using closing prices. The last bear market ended March 9, 2009, when the S&P 500 closed at 676.53.
On Sept. 20, 2018, the S&P 500 closed at 2,930.75. The trough was set on Christmas Eve at 2,351.10, a loss of 19.78 percent over just three months. Historically, that’s a pretty short time frame, though not the shortest. In 1987, it took just 55 days to reach bear market territory.
On Thursday, the S&P closed at 2,488.83. Over the past two days, the decline narrowed to 15.08 percent. How did that happen? On Wednesday, the S&P 500 rose over 4 percent.
If you make your investment decisions based on the currency of the markets — buying and selling based on current market moves — you’ll never get ahead. So, it’s best to ignore the news and interim market moves unless you are a momentum trader, a day trader or leveraged.
Traders need to be alert to daily and intraday market movement; they need to be nimble and flexible, and react to what the market is telling them.
Anyone who is leveraged is taking on extra risk, necessitating deleveraging when the market moves against them. The idea is to act when perceptions move from “risk on” to “risk off.”
But what about the average everyday investor?
From my perspective, with decades-long professional experience in the financial markets, I can tell you that individuals who invest their own money by themselves have an additional issue to deal with when markets roil: the investor’s conflict (wanting what is not possible — that is, high returns at no risk).
That conflict can drive investors to try to predict where the market is headed, which is a fool’s errand. Any person who wants to retire someday needs to think long term — very long term.
The fact is that the historical period we are experiencing right now belongs to all who are investing their 401(k)s at work, and their IRAs and personal accounts at home. It is our market. We own this historical period. The stock market you are experiencing today belongs to you.
Your experience in the market is range-bound by the historical period of time that you have been and will be investing.
Say you turned 25 in March of 2000, when you first started investing through your 401(k). “Your market” started at a peak when the S&P 500 hit a high of 1,527. You would have experienced the next bull market of October 2002 through October of 2007, and the following bear that ended in March 2009, followed by the current bull.
But what if you had turned 25 in October of 2002 instead, when the market started at 776, followed by a bull run of 60 months before terminating at 1,565 in October of 2007?
In the first case (turning 25 in 2000, the top of a bull market), your return would have been about 5.8 percent for a single investment in an S&P 500 index fund. However, if you had invested monthly, as you would have through your 401(k), your return would have been close to 9 percent. Why the difference? You would have been purchasing shares at discounted prices during the market declines.
In the second case (turning 25 in 2002, the bottom of a bear market), you would have had a return of about 10 percent (here there was no meaningful difference between a single investment versus monthly investments).
The market’s boundaries are flexible and can be erratic and emotionally taxing over short periods. But stand back, and from a distance you’ll see a different story: No matter what historical market period you find yourself in, you own that market — it’s yours. Get to know what it can do for you.
On another note, if you are a believer in financial literacy education, as I am, you may be interested in an award that I’m sponsoring, the first 401(k) Champion Award. My goal is to shine a light on 401(k) participants who see their 401(k)s as enabling them to retire securely. If you know anyone who “loves” his or her 401(k), please him/her to apply. For rules and deadlines, go to juliejason.com/award or email me at read[email protected]jason.com. Julie Jason, JD, LLM, a personal money manager (Jackson, Grant of Stamford) and author, welcomes your questions/comments (read[email protected]jason.com). Her awards include the 2018 Clarion Award, symbolizing excellence in clear, concise communications. Her latest book, a curated collection of Julie’s columns, is “Retire Securely: Insights on Money Management From an Award-Winning Financial Columnist.” To hear Julie speak, visit juliejason.com/events.