The Norm of Volatility

We’ve got turmoil in the financial world and, generally speaking, nobody is happy about it.  All client portfolios took a hit in the 3rd Quarter, and September was absolutely brutal for equities (stocks).  Just so we’re not conveniently avoiding the conversation, your portfolio got hit a little harder that ‘average’ as it is tilted toward the spots that have better return over the long run.  The small and value companies got hit in this quarter of heightened uncertainly.  Yet standing back so we have a better view, the real question is what does that mean to investors?  In that light, let us share with you some very powerful data.

Take a look at the summary linked here called ”S&P 500 Index Return Analysis”. It takes an annual reading of the returns of all big firms in the United States over the past 84 years ending December 31, 2010.  For curiosity sake you can look to see what happened in the year you were born, but for investor’s sake, I would instruct you to note;

  1. 4% of the time, markets were up.  That translates into the adage the market is up 3 times out of 4.
  2. Of greatest interest, however, note that even in the 60 ‘up years’, the market saw great intra-year negative volatility.  When I speak of negative returns, I’m speaking of individual quarters in that particular year where the portfolio return was negative, and certainly not indicative of a good year to come.  You will please note;
  3. 3% of those ‘up’ years had at least one ‘down’ quarter, and quite a number of them 2 down quarters. This means it was not only not uncommon to have a bad quarter, but that you’d be an undying optimist to think the market would have 4 positive quarters, even when the year ended positive.
  4. ‘Down’ quarters in ‘up’ years could be pretty dramatic. 3-8% down quarters were more the norm, and at times the quarterly drops would be 18-22%, enough to put the jitters in any prudent man or woman.

Whether your persuasion was Democrat or a Republican, I think that we have a ‘leadership crisis’ in the country and people are looking for stability.  It’s my guess the market fluctuations are going to occur until great leadership and stability are exhibited, and perhaps then we’ll probably see a nice long run upward, temperate though it may be.  Exactly when that clarity becomes evident is NOT known to today, which is why the well-respected economist John Kenneth Gailbraith said;

“The only function of economic forecasting is to make astrology look respectable.”

Learn from the past that nothing is “new” in volatility.  What is new is how we more intelligently should react toward it, and that is with wisdom.