Understanding Market Volatility


Understandably, some investors have been shaken by recent stock market volatility.  But they would be well served to ignore the temptation to wait for “a better time to invest” or pull out of long-term investments and into “safe” investments such as cash or CDs.  The reason?  Here’s how a $1,000 investment in Standard & Poor’s 500 Composite Index would have done if made on the day these events occurred and held through the periods shown:

 

5 years later

10 years later

20 years later

Through 12/31/06

Great Depression (1/1/34)

$1,660

$1,998

$7,596

$2,528,717

Pearl Harbor bombed (12/7/41)

2,046

4,485

20,982

1,790,695

John F. Kennedy assassination (11/22/63)

1,790

1,973

5,369

82,504

Vietnam conflict escalates (8/10/64)

1,347

1,369

4,585

68,611

Nixon resignation (8/9/74)

1,653

3,350

12,996

50,104

Dow falls –22.6% in one day (10/19/87)

2,188

5,635

—

9,788

Iraqi troops invade Kuwait (8/2/90)

1,846

5,171

—

5,673

Tech bubble burst (3/24/00)

829

—

—

1,038

Terrorist attacks in U.S. (9/11/01)

1,298

—

—

1,425

U.S. invades Iraq (3/20/03)

—

—

—

1,735

                   


A study by Fidelity also indicates that from 1992 through 2007, missing the best 10 market days would have reduced an investor’s return by nearly half!

The historical data supports that staying invested is, statistically, the best approach.  This information is widely accepted by the investing public.  We could expand this data to illustrate the additional power of diversification (see Our Core Investment Strategy).  Again, the power of diversification is almost universally accepted in the financial community.  Yet, these two tenets are widely ignored when market conditions weaken. 

Investors generally think that current conditions are so dire, markets will never recover.  To rebuke that notion, consider the magnitude of the events referenced above.  Are current conditions worse than they were when Pearl Harbor was attacked?  Or when the President was impeached?

In summary, current stock prices are not as important as investment time horizon.  If you have a longer time horizon, you should have market exposure.  If you do not, you should not be in equities.  Please give us a call at (319) 364-3041 to discuss the efficient allocation of your investment portfolio in greater detail.       



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