Volatility has certainly returned to the financial markets this quarter! Staying invested in a volatile market takes a certain amount of intestinal fortitude, but it’s not without reward. The chart below demonstrates how difficult it is to time the market – you have to be right twice – when to sell out of the market and when to buy back in.
The penalty for guessing incorrectly is significant. For example, the total return for the S&P 500 Index during the 20-year period of 1997-2016 was 7.68% annualized (per year average). Missing the ten best performance days during that 20-year period reduced the annualized return to 4.00%, nearly half of the return per year wiped away because of just ten days over 20-years.
Many times, as was the case in August 2015, the best performing days are preceded by the worst performing days. It is in these moments when disciplined investors are rewarded for staying the course while others find themselves on the wrong side of two significant events – deciding to sell right after the worst performing day and then deciding to buy back in after the best performing day.
During times of volatility, it is important to remember the basic principles of investing; constructing a long-term investment plan with an appropriate investment policy statement, proper asset allocation, diversification, and discipline. As your advisor, our job is to remind you of these basic investment principles so that you stay the course and have the best opportunity to achieve your long-term financial goals.
