by Tyler Curtis
Over the past month the Dow Jones industrial average has traded in a nearly 1,000 point or eight percent range. In just a few days alone the average surged 800 points, or about seven percent. This increased volatility is becoming more of the norm in today’s markets and has caused many investors to fear the stock market and look to alternatives such as annuities or bonds.
It is true that political and macroeconomic shocks have played a major part in increasing market volatility this year; however, I believe the average investors’ perception of risk elevation has increased unproportionately when compared to the actual risk elevation. Investors have many reasons to be stressed out today: stagnating wages, job security, declining property values, and rising medical costs. When investors are stressed they are inclined to perceive higher levels of risk.
It can be difficult to block out all of the market noise when a news headline out of Europe or Washington can immediately move the market a few hundred points, but ignoring these swings is essential to an investor’s success.
For a little perspective let’s take a look to the past. Twenty-five years ago, in 1986 the S&P 500 index was at 250 points. Today the S&P 500 index is around 1,250 points, nearly 5 times what it was at in 1986. Over the twenty-five year period, the S&P 500 has grown at a 6.6% annualized growth rate. If dividends are included, the total return over this same time period is nearly 10% per year. Many studies have shown that the average stock market investor has drastically underperformed the S&P 500 over this same time frame due to common mistakes such as poor market timing and emotional decisions.
It doesn’t take much to scare most investors out of the stock market, and over the past twenty-five years there has been a fair share of issues to worry about.
For example in 1986 the Cold War was still in effect, the U.S. deficit was high, and many were worried that the Japanese economic “Supremacy” would make the U.S. a second rate nation. In the twenty-five years since then, the stock market has crashed three times (1987, 2000-02, and 2008-09). There has been three recessions, two Iraq wars, the Asian financial crisis, and the Japanese economy has spent two decades in recession.
In spite of all these economic and political issues the S&P 500, including dividends, has still returned nearly 10% over the period. Nonetheless, most investors did not experience this level of returns because they let their emotions drive them in and out of the stock market at inopportune times.
There is always going to be uncertainty in the market place and new economic /political struggles will continuously evolve with the times. That is why it’s so important for investors to take a steady long term approach to investing, while recognizing and planning for the many speed bumps they will undoubtedly encounter along the way.