No one knows what the ultimate economic effect of COVID-19 (the novel coronavirus that started in China in late 2019) will be.
As usual, investment markets HATE uncertainty. So, the day-to-day volatility of the S&P 500 Index and other broad stock-market indexes should be no surprise. Yet, these ups and downs are still troublesome for many investors to stomach.
There are two realizations that we all must accept:
First, understand that volatility has been higher before—and it may even increase again until things smooth out.
Next, remember that declines are a normal part of the overall investment experience. Because the U.S. stock market has, until recently, seen an unusually high number of “up” years, accepting this may present more of a challenge.
How much volatility are we really experiencing? Is it as bad as the headlines these days make it seem?
There are several ways to measure volatility in the stock market. One easy method is to calculate the rolling 12-month average difference between the daily high and low of an index relative to the price of the index itself at market close.
If we use this approach, we can see that U.S. stock-market volatility is nowhere near its 30-year average in the past year—even when we take the recent ramp-up into consideration.
Something else to consider: While some market downturns are larger than others, it’s still possible to realize positive returns even in years that see big declines.
Let’s use the S&P 500 Index as an example. This broad stock-market index, which represents the largest U.S. companies, earned an annualized return of more than 6% over the past two decades—a period that included both the Tech Bubble bursting in 2001 and the Global Financial Crisis in 2008. The average intra-year decline over this period is more than 15%.
Market volatility is inevitable. COVID-19 happens to be the crisis du jour. But eventually it will pass—and some new catastrophe will emerge.
Because of this, a diversified portfolio remains—as always—one of the best ways to reduce risk.
If you’d like some reassurance or even a second opinion on your portfolio, we can help. Click here to set up a no-cost, no-obligation meeting with one of our experienced financial planners.