Zacks Investment Management

Stock market volatility continues unabated. It may be too early to tell, but I’m marking the top of this current market correction at July 20, with the bottom still to be determined (though I’d say it’s still a few weeks off). Since July 20, investors have had a rocky ride with the market having traded down 1%, or more, in 10 of 45 trading days (through September 22). Quick math indicates the market has fallen over one percent 20% of the time in the last two months. That sure feels like a lot.

In this pronounced patch of volatility, investors are constantly tempted to sideline their portfolios (wait in cash) to let the market cool before recommitting to stocks. I’d guess that in each of those 1% or more down-days, a slew of investors headed for the exits, selling equities with the intent of “waiting it out.” In my view, that’s a mistake.

Maintaining Perspective and the Dangers of Bad Timing

Indeed, history tells us – time and again – that such a move is often ill-advised and costly. Downside volatility is not only common in bull markets, it’s often been worse than what we’re seeing today. Headline grabbers like this one from August 24 stating “After Historic 1,000 Point Plunge, Dow Dives 588 Points to Close” can freak-out even seasoned investors. “Historic Plunge. Dow Dives.” Makes one queasy. Reality: the market (measured by the S&P 500) fell 3.94% that day – hardly its worst day in history – and, it is positive since then.

Think about it: the market is positive since then. You simply will not see this narrative in the news because optimism doesn’t sell. But, that is the perspective most investors need to ‘stay cool’ when the ‘heat turns up’ to keep their eye-on-the-prize for the longer term outlook (which I still believe is positive for stocks).

Instead, many see current market volatility as unprecedented, because it’s easy to forget historical patterns. But, it’s simply not unprecedented and, in fact, it’s rather ‘light’ so far. Here are a few factoids to help keep us grounded:

• Since the Great Depression, the S&P 500 has fallen more than 5% in one day on 20 different occasions – it hasn’t once in 2015.
• The market has fallen over 1% in ten trading sessions over the last two months. While true, what’s missing is that no one ever talks about upside volatility! The market has also risen more than 1% in seven of those days, meaning that on any given day the market is almost as likely to pop as it is to dip (over time, it’s more likely to rise, as the market has historically risen more than it has fallen).
• Since 1929, in the 12 months following the end of a bear market, a fully invested stock portfolio had an average total return of +37.4%. But, if you missed the first six months from the bottom of a bear by being in cash, your return would have only been 7.5%.

Moving to the sidelines in cash can hurt if you don’t time the market properly, which few can:

• Between 1995 and 2014, a fully invested $10,000 portfolio (in the S&P 500) would have grown to $65,453, for an annualized return of 9.85%.
• However, If you missed the 10 best days in that time span, your investment would have only grown to $32,665, or an annualized return of 6.10%. Miss the best 30 days, and you barely annualize 1%.

Bottom Line for Investors

Remember that volatility works both ways, and a market recovery following a correction is often just as steep as the preceding decline. This means the window for timing a correction is typically extremely narrow and is simply not worth the risk trying to get right. Going back to the example of missing the 10 best days from 1995 – 2014, it is also true that six of those 10 best days occurred within two weeks of the 10 worst days. Read: the market tends to whipsaw. If you sell after a really bad day, chances are one of the good days you need for recovery is right around the corner. My advice – keep your cool; your portfolio and blood pressure will appreciate it.

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

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