Rockbridge

January 16, 2020

Investment Committee

Reassessing volatility

2018 was a less pleasant time to be an investor. In the four trading days leading up to last Christmas, the market dropped 7.7%, capping off what was a nerve-racking year for investors. But when we delved deeper, we found that 2018’s volatility wasn’t that unusual.

One measure of market volatility is looking at the number of days in which the market moves more than 2% in either direction. Since 1928, the stock market has annually averaged 17 such “volatile days” and over the last 30 years, the average stands at 16.

In 2018 we had 20 volatile days, making it more volatile than usual but not horribly so. One of the reasons it felt so volatile was because prior years lacked volatility, including 0 volatile days in 2017. Overall, 2019 was a pleasant year to invest. The market had a smooth ride with U.S. large caps up around 30% at the time of this writing, making 2019 the 17th best year since 1928.

This year we only saw 7 days of high volatility and two of those had happened by January 4 . In August we witnessed three such

days, all negative movements, as investors began to fret about an upcoming recession. However, the slow-down has not materialized and the market rallied to close out the year.

It pays to be invested and part of the reason long-term returns are so good is because it’s not easy to stomach market losses when things are bad. Staying grounded is key; when we have years like 2018 it’s important to remember the years like 2019 and vice versa.

Unfortunately, bad times will come, and when they do, we can take comfort remembering we’ve survived worse. In 1932, there were 133 volatile days, more than half of the year’s 250 trading days. The stock market dropped 43%, nominal GDP declined 23%, the dollar deflated 10%, and unemployment stood at 24%… but hey, the U.S. cleaned up at the Los Angeles Summer Olympics (in fairness, the number of countries participating declined 20% from 1928 to 1932 due to cost).

So, what’s the lesson here? Volatility is normal and we can’t predict its arrival. 2019 was a low volatility year with great returns while 2018 was the opposite. However, being invested through both has made Investors better off. Stay invested, diversify, and rebalance when volatility strikes (buy low, sell high). This isn’t always easy to do, but it’s one of the main reasons we are here as your financial partner.

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