Are There Safe Retirement Investments in a Volatile Market?
Today’s stock market seems quite volatile, and perhaps this has been keeping some long-term investors from investing in stocks—which is a shame because stocks are one of the best performing liquid asset classes over long periods. Unless you’re a day trader, you shouldn’t pay much attention to daily volatility. Long-term investors by definition have a time horizon longer than a single day—typically many years, if not decades. In that context, measuring long-term volatility is much more relevant for your overall retirement strategy.
Stocks over long periods of time are much less volatile than most people think. So why doesn’t this seem like the case? Human emotions are fickle and often skewed by the barrage of information coming from a 24-hour news cycle. The reason the market seems so volatile right now is a function of our short-term memories.
The mid-2000s were a period of abnormally low volatility—the market moved significantly higher with little gyration along the way, matched only a few times in over 100 years. We simply don’t remember this lack of volatility is the exception, not the norm.
Daily S&P Closing Change > 1% or < -1%
Source: Global Financial Data Inc. and Fact Set Data Inc. as of 1/7/2014; S&P 500 Price Return Index
The chart above depicts daily swings of more or less than 1% (volatile). Historically, stocks have been positive 53% of the time on a daily basis. However, history also shows the longer the holding period, the greater the likelihood that stocks have positive returns. Note while daily volatility is high, over a long enough time period stock performance is uniformly positive. As long as you’re a long-term investor, try not to sweat the market’s short-term gyrations, challenging as that is. Focus on the long term and don’t let your mind make you believe stocks are more volatile than they are. Failing to do so may hurt your chances of long-term retirement strategy success.
S&P 500 Price Return Index
Daily S&P 500 return data begin 1/3/1928, and are based on price appreciation only; all other data begin 1/31/1926 and reflect total returns.
The Historical Frequency of Positive S&P 500 Returns**
Source: Global Financial Data Inc. as of 7/26/2013
*Daily S&P 500 data begin 1/3/1928, and are based on price appreciation only; all other data begin 1/31/1926 and reflect total returns.
**Calculated using monthly rolling holding periods from 1/31/1926 - 6/30/2013