Why Market Volatility is a Good Thing?

Hi, I’m Ben Ruttenberg. I’m a wealth advisor with EWA and today we’re going to talk about market volatility and why it could be a good thing for your financial plan. When equity markets are falling, a lot of people want to talk about market volatility.

And this is something that can be very, very scary, particularly if you’re in retirement or approaching retirement. We’ve been lucky to coach hundreds of clients through difficult market times and understand the fears and anxieties that come with market volatility.

And what we’ve determined is market volatility itself isn’t destructive, but making reactive investment decisions during volatile times can be destructive to your long -term financial plan. To further illustrate this point, want to draw your attention to this exhibit showing from 1992 to 2012, if you just put your money in the S &P 500 index and didn’t touch it for that 20 -year time frame, you would have received an 8 .2% return.

And the average equity fund investor over that same 20 -year time period only averaged 4 .2% return. So really large opportunity cost. Why is that? People giving into temptation of selling instead of staying disciplined with their long -term plan. And at the end of the day, investors are better served staying invested during all stages of the market.

The next exhibit is showing five -year rolling returns versus 30 -year rolling returns. This just goes to show that volatility exists over short -term time horizons. Returns can be negative over a five -year short -term time horizon as we’re seeing here. However, in the long -term, 30 -plus years, there has been no period in history where you saw a negative return.

And the last exhibit is the Wall of Worry exhibit. This just goes to show that short -term fears can cause you to consider an upcoming bear market. However, there have been overall positive returns despite all the world happenings.

It’s very hard to pinpoint one international or United States event that can cause a bear market. So it’s always better to stay invested despite what is going on in the world around you. So can volatility be a good thing? Well, first we need to define what volatility is.

Most people refer to volatility as drops in the market, but really, volatility is positive upswings and negative downswings in the market. And it is those positive upswings in volatility that will be crucial to your long -term financial success. The market on average changes about 0 .7% per day.

So if there’s a day where the market goes up 2%, 3%, even 4%, that is a very, very volatile day in the market. However, it is not perceived as that way. It is just perceived as a good day in the market. Whereas if the market dropped 2%, 3%, or 4%, it would be considered a very, very volatile day when they are actually the same level of volatility.

Reason for this is because of the idea of loss aversion theory. This exists in investing and also exists in other aspects of life itself. It is that losses feel worse than wins feel good. This is very, very relevant with market volatility.

When your portfolio goes down, it feels a lot worse than when your portfolio. Then how good it feels when your portfolio goes up. If you’re a sports fan, I’m sure you can relate. I’m an Ohio State fan, so when Ohio State football loses, it feels a lot worse than when Ohio State celebrates a good win.

So with market volatility, it’s important to understand that the positive aspects of volatility are important and are crucial to your long -term financial success.