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March 06, 2019

One thing that you can be assured of in the stock market is that there will always be volatility. For the month of December, the S&P 500 posted a 9% decline. At its lowest point on December 24th, the index was down a whopping 16.2%. As of March 6, we are just about 6% below the all-time high the S&P 500 hit on September 21, 2018.

Often investors make the mistake of selling their stocks during periods of extreme volatility. They end up selling at the low. Compounding the problem, they often stay in cash too long and miss the rebound in the market that is common after such a big sell-off.

If you are an investor with a long time horizon and a diversified portfolio, some good advice is to get invested and stay invested. Volatility in the markets is normal. On average a 5% pullback happens about once per quarter, a 10% pullback happens once per year and a 20% pullback happens once per cycle. You need to understand what is driving the market lower before making a quick decision to sell.

Since 1980, the average intra-year drop in the market is 14.2%, however, the market ended the year higher 76% of the time. In the table below, the dots show the drop in the market during the year and the bars show where the market closed at the end of the year going back to 1980.

Focusing on the long-term and creating a diversified portfolio are two of the most important aspects of investing. Examining rolling returns for equities shows that historic annual yearly returns range from down 39% to up 47% while rolling annualized returns over a 20-year period have always been positive.

The last 20 years have favored the diversified investor, it is expected the next 20 years will do the same. At Chatham Wealth Management, we customize portfolios for clients that are built to mitigate volatility. We use individual stocks and bonds to create a portfolio based on our clients needs, time horizon and risk tolerance that will help them meet their financial goals. Contact us if you would like us to perform a complimentary portfolio review or to discuss our process.

Brian McGeough
Relationship Manager
Chatham Wealth Management