Volatility is an inescapable feature of equity markets. But for long-term investors, fixating on short-term market movements can be counterproductive. No one can avoid all negative volatility, and attempting to can be hazardous to your longer-term financial health. If you attempt to side-step corrections or regular negative volatility by jumping in and out of the market, you can incur transaction costs and likely miss out on the good kind of volatility—to the upside.
Volatility is near-constant. In the accompanying chart, the S&P 500 Price Index is plotted in logarithmic scale to help you see the percentage moves. (Logarithmic scale plots percentage moves equally.) The red and yellow dots denote daily moves of greater than -2% and -1%, respectively. The light and dark green bars represent the numbers of days each year with moves greater than -2% and +2%, respectively.
Market Volatility in Perspective (Click to Enlarge)
Source: Global Financial Data, as of 1/13/2016; S&P 500 Price Level from 12/31/1927 - 12/31/2016
From 1928 through 2016, the S&P 500 Index fell more than 1% intraday 2,692 times, or every 9 days on average, yet rose by more than 1% 2,787 times. The index fell more than 2% 785 times, or every 30 trading days on average. Yet over this seemingly volatile span from 1928 to 2016, the S&P 500 rose more than 12,577%. A hypothetical investment of $10,000 in 1928 into the S&P 500 would have grown to $1,267,741 by 2016—not counting dividends. These returns are the reward for taking on short-term volatility.
Volatility today isn’t much different than in the past. Although individual years vary, higher or lower volatility is never permanent and does not predict returns. Taking a longer view can help put short-term volatility in perspective. Through good times and bad, volatility is an unavoidable feature of the stock market, but day-to-day or week-to-week volatility doesn’t keep the market from going up over time.