What We Know

Published On: October 14, 2021

Written by: Ben Atwater and Matt Malick

The stock market volatility this fall reminds us of the churn in the spring of 2018, but still far below that of March of 2020 when markets were first digesting the news of COVID-19.

Early 2018 was certainly a far cry from the market of 2017. What a difference a year can make. By April of 2018, the Standard and Poor’s 500 Index had risen or fallen 2% nine times – compared to zero times in 2017.

And in the COVID-inspired selloff of 2020, the market fell more than 30% in just over one month.

When volatility seems harsh, you need not look far for similar and even much worse examples. Volatility is normal for markets.

Stock market volatility – major up and down swings in price – is a necessary evil. Investors could not earn solid returns in stocks without volatility.

As an equity investor you are effectively compensated for the willingness and ability to stay the course during difficult times. If you wanted an investment with little volatility, you would invest in a 90-day Treasury Bill and receive a commensurate return (0.05% as of this writing).

Paradoxically, wild stock price movements result in higher returns. We should embrace volatility. Vanguard studies estimate that simply staying the course and sticking to an investment discipline adds 1.5% per year to an investor’s long-term performance.

When volatility hits markets, it is important to reflect on our investment process and what history has taught us. Therefore, here is what we know . . .

We know . . . our clients do not have short-term money allocated to equities. Quite the contrary, our client equity allocations have time horizons from three years to more than fifty years.

We know . . . 2020 COVID crash aside, markets have been strong for a long cycle now, but we have not been greedy, chased returns or strayed far from our long-term targets. This discipline helps position us well for corrections, or worse.

We know . . . even though things could further deteriorate, including this pullback ultimately becoming a correction, it’s not wise to sell equities in a correction (or even in a bear market). If a client needs cash, part of our volatility protocol is to distribute money from accumulated interest, dividends and / or from maturing fixed income positions, when possible.

We know . . . bull markets do not last forever, and we are in an especially long cycle (depending on how you score the 2020 COVID Bear Market). Even if this volatility is short-lived, there will be further volatility to come (there always is). Being mentally prepared for a bad market is always helpful.

We know . . . our dividend-paying and more value-oriented stocks have some margin of safety. We find comfort in stocks that pay a dividend and have a reasonably estimated intrinsic value.

We know . . . in a volatile market we can only hurt ourselves by making decisions based on fear, emotion or confirmation bias.

We know . . . trusting a disciplined investment process is the only way to defend against inflation and achieve long-term goals. Even during a rocky market, or worse, investing is a “necessary evil” for us to accomplish our long-term financial goals.

All that said, we do not know where markets are headed in the short-term. For markets, it could be a pleasant holiday season, or a miserable one, no one knows. The good news is that come November, the seasonal headwinds most common in September and October may turn to the seasonal tailwinds of year end. Regardless, we’ll focus on what we know and stick to our investment discipline.