Monday, September 29, 2014

Who Knows What The Stock Market Is Doing?

There are two questions I’d like you to consider. First, would you say you have thought about your investment portfolio more, less, or the same amount as usual during the last five months? Second, do you know how much the stock market has either increased or decreased in value over the last five months?

Of course, there will always be certain investors who take pride in following the market meticulously or simply just enjoy doing so. But I’d contend that a high percentage of investors have thought less about their portfolio during the last five months than they normally would. Further, I’d argue that more investors than usual are unaware of whether the market has gone up or down during the last five months and by how much.

Why is this? Have our work or retirement schedules kept us busier than normal over the last five months? Not likely. We’ve certainly been concerned about ISIS, hurricanes, what Scotland would do, and wars in Israel, Iraq and Ukraine, but is it the additional anxiety from those events that has prevented us from following the stock market? Probably not. So why are fewer of us than normal aware of what the market has done lately?

A common adage is that negative events happening over a short period of time capture the headlines, while progress happening over an extended period of time commonly goes unnoticed. How many headline-worthy days of large market movements have occurred during the last five months?

Amazingly, between April 17 and Sept. 23 (110 trading days), the S&P 500 has either increased or decreased in value by more than 1% during only four trading days:

Date                       S&P 500 Return
7/17/14                 +1.19%
7/18/14                 -1.03%
7/31/14                 -2.02%
8/08/14                +1.11%

That’s a period of more than five months during which the market experienced a significant movement (defined as 1% or more either up or down) only four times, or only 3.6% of the time! A period of such low volatility is especially rare in today’s market environment. By comparison, since 1950, the S&P 500 has moved more than 1% by the end of 20% of all trading days. Moreover, all four significant movements during the last five months occurred within an approximately three-week time frame, between July 17 and Aug. 8. If we exclude that three-week period, we would have four and a half months during which the market had no trading days resulting in significant movements.

It’s interesting to recognize that although the market hasn’t experienced many significant daily movements over the last five months, it has changed in value considerably over the time period as a whole. In fact, from April 17 through Sept. 22, the S&P 500 has actually increased in value by 7.28%. Simply, a low volatility environment where the market consistently obtains small daily positive returns has been quite advantageous for investors, despite having few days of large gains.

So what investing lessons can be taken from this pleasant five-month period? First, I’d encourage investors to not get too comfortable. Remember that the last five months have been a period of unusual stability in the investment markets and such low levels of volatility cannot continue in perpetuity.

Of course, this is not necessarily a bad thing—we expect a level of risk when investing in stocks, and it is ultimately the presence of risk that enables appealing returns in the long run. Consequently, the return of volatility should not frighten investors and certainly should not be interpreted as a signal to alter your long-term investment strategy.

Finally, allow me to pose one last question: Regarding financial and investing matters, have you been more, less, or equally happy compared to the norm during the last five months? Studies indicate that if you have been thinking less about your portfolio, you have likely enjoyed reduced levels of stress and increased levels of happiness. Why not learn from this experience and attempt to think less about your investment portfolio when a normal amount of volatility returns to the market?

Remember that your portfolio was constructed with a focus on the long-term and that short-term volatility is ultimately inconsequential. Consequently, regardless of day-to-day market movements, you should worry less about your portfolio and focus on the things that make you happy.

*This article was originally published on NerdWallet's Advisor Voices.


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