Admittedly, the past few years in the stock market have felt almost too good to be true. The markets continued to rise, hitting new highs what seemed to be weekly. The Nasdaq Composite, which is heavily weighted with Tech stocks, was growing at a rapid pace, having gains of 35.23% in 2019 and growth heading into 2020. The events of March 2020 shocked the world and subsequently the stock market resulting in sharp declines in the three major indexes that represent the movements of the stock market as a whole, the NASDAQ Composite, the S&P 500, and the Dow Jones Industrial Average. Many feared this would be the end of the bull market we were experiencing and would result in a bear market moving forward. But, again the markets bounced back and kept moving. Despite the sharp declines in the middle of the year, the NASDAQ gained 43.64%, and the S&P 500 Index and the Dow Jones Industrial average followed with gains of 16.26% and 7.25% on the year. The markets continued to rise in 2021 despite continued economic and social problems relating to the COVID-19 pandemic. For many investors it felt like the train was going to be headed up forever. But this year has been different.
No investment is without risk. There is always risk that the value of an asset might fluctuate. This fluctuation of the price of a security in the market is called volatility. Usually when people think about the word volatility they think negative returns and loss of value. However, Volatility goes both ways. Downward market volatility means that prices go down and values of portfolios drop. This also is seen as a potentially great time to buy, because prices are low. Upward market volatility is what investors are looking for. Price appreciation and the upward movement of markets is what keeps people happy and helps move their money goals forward. For a long time, this was the type of volatility the markets we’re experiencing. Yes, prices were changing rapidly, but the changes were positive and millions of investors benefitted. Volatility though goes both ways and that is why it is in fact the price of admission.
If any of you reading this are either clients of ours with investments or are readers who follow the markets in any way, you know that this year has been a very poor one for equities and fixed income alike. The S&P 500 had its worst start to a year since 1939. The broad index dropped 13.5% between the start of the year and the end of April. In the past week we have seen wild upswings and massive sell offs. As an investor, this can be a hard thing to swallow and stomach if you do not have the right mindset.
Every financial professional has the duty to serve their clients with their best interest in mind. What must be included in that servitude is the explanation of volatility and the role it plays in saving for your future. The reason you invest your money rather than leave it in the bank is obviously so that you earn a return that compounds on itself over time. Investing allows your money to start working for you. The hard earned dollars you made are invested into entities where they have the opportunity to grow and multiply. But it also has the opportunity to lose value, sometimes a lot of value. This year has been a wakeup call to a lot of everyday investors that in fact the stock market is not always sunshine and roses. It is incredibly important to remember that this volatility is in fact normal, and it is the price you pay for entering the market. Sure, you also pay fund fees if you are invested in mutual funds and other expenses to do with trading, but you get the point. If you want to ride the rollercoaster you have to pay to get in. Volatility is the price.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. No strategy assures success or protects against loss.