The market was up for most of last week, falling on Friday with announced retail sales numbers reflecting the largest drop in history, and increasing China-US trade tension. On a year over year basis, though, we are still almost even with last year.
As this crisis continues, anxiety and fear can make even the most seasoned investor cautious about their investments. But I think some perspective on investing might help. First, bear, or down, markets are common. We’ve had 7 bull-bear cycles in the last 58 years. Staying the course over that cycle has averaged a 12% return in the S&P 500 Index.
And even in a bull, or up, market, we have significant drops. If you look back over the 20 years ending December 2019, 15 years were positive. 14 of those years had a drop in the market during the year of greater than 5%. Take 2012 for example, the S&P 500 was up 16% -- but had a decline during the year of 10%. Which means if you tried to time the market and got out, you could have potentially missed a 16% gain. We often say it is time IN the market, not timing the market, that counts. On average, 3 out of every 4 years are positive in the market – meaning 1 out of 4 isn’t. So the odds for a one-year investment are okay, but not great. We’ve had fewer five-year negative periods, and a small handful of negative 10-year periods. There has never been a negative 15-year period on the market.
What we do see, and what causes fear, is volatility. What is volatility? There are multiple ways to measure that. Advisors may use statistical analysis to track the “risk”, or volatility of an investment. Looking at the market as a whole, we use price fluctuations during the trading day as a common measurement. We look at difference between the high and the low index value (or an individual stock price) divided by the closing price. Historically, that number for the S&P has been about 1.25%. Right now, we are below that historical average, meaning the markets are calmer than normal.
Another measurement is the VIX Index, which is forward looking. The Chicago Board Options Exchange calculates the VIX based on options pricing for the S&P 500 Index. An option is the right to purchase or sell a security at a future date. Changes in the price of options over the next 30 days provides the measure of expected volatility. The VIX is sometimes referred to as the Fear Index. The VIX spiked at 82.69 on March 16th, but has trended downward since then, although it is still higher than the historical average.
So what does all this mean? First, the markets are showing better days are ahead. Second, keep a long-term perspective. Work with a professional to develop a plan and stick to it.
If you have a big pile of documents that need to be shredded, CovingtonAlsina is hosting a community shredding event on Saturday, May 23rd from 2 to 4. Details are on our website. It’s free, but we will be accepting donations for Feed Anne Arundel at the event.
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Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. CovingtonAlsina and Great Valley Advisor Group are separate entities from LPL Financial.
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investment(s) may be appropriate for you, consult with your attorney, accountant, and financial advisor or tax advisor prior to investing.
And if you don’t have a financial advisor, or you haven’t heard from yours, come talk to us. This is Ann Alsina with CovingtonAlsina.