Julie Ja­son: How to view a volatile mar­ket.

Stamford Advocate (Sunday) - - Sunday Business -

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.

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