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Long-term investors should look beyond stock market volatility

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While stocks historically have been volatile, especially in response to major domestic or world events, a review of market data show that their prices in many cases have returned to less volatile patterns over longer time periods. That can be good news for long-term investors.

Uneven worldwide economic growth, the uncertainty caused by government fiscal and monetary policies, and political unrest around the world often prompt an increase in market volatility that can unsettle many investors.

In the stock market, volatility typically refers to the size and frequency of price movements. In general, higher volatility means a wider range of potential gains and losses and the possibility of sharp price moves over short time periods.

An analysis of market data beginning with the years just prior to the 1929 stock market crash shows that periods of volatile price movements have not been unusual. Volatility historically has increased during times of major global events or economic disruption. It then gradually has declined for a period of time to what might be considered more normal levels, often after the triggering issues are resolved.

Cost of missing the market

Some people believe investing is a matter of timing. They say it’s best to invest heavily in stocks when the market is going up, then get out when the market starts going down. But there’s a problem with that strategy: Even the smartest investment professionals can’t accurately predict the exact timing of such market moves.

Long-term investment success is more likely to be the result of a consistent approach, based on time in the market — not market timing. For example, selling when markets decline can put investors on the sidelines when stocks change direction. Turnarounds can happen quickly and typically have been strong in their early stages. Missing even a few of the stock market’s best single-day performances could have a significant effect on an investment portfolio.

Value of an investment plan

History shows that it’s rare for the stock market to have two bad years in a row and even more rare to record three bad years in a row. When the market has recovered from downturns, it historically has done so with powerful rallies. In addition, bull markets historically have lasted three times longer than bear markets.

Even in the worst 20-year period the stock market has ever experienced — 1928 to 1948 — the S&P 500 Index posted an average annual gain of 0.55%. While that is a modest amount, remember that those two decades included the Crash of 1929 and the Great Depression of the 1930s, when unemployment soared to 25%, U.S. gross domestic product plunged by more than 30% and land values plummeted more than 50%. Despite the economic challenges of those difficult years, a patient and committed investor could have had a positive return on money invested in the stock market.

Overall, history shows that patient investors who remain focused on the long term may withstand turbulent periods and take advantage of the opportunities that global change can bring.

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Associated Tags: Economy, Market Volatility

Past performance is not a guarantee of future results. 

All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.  This blog is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy.  A regular long term investment plan does not ensure a profit or protect against loss in a declining market.  Standard & Poor's market-capitalization weighted index focuses on the large-cap segment of the U.S. equities market. The index is unmanaged and cannot be directly invested into.  

This information is provided for informational and educational purposes. It is not to be construed as advice and is provided as general information to assist in understanding the issues discussed. Waddell & Reed believes the information has been obtained from sources considered to be reliable, but does not guarantee the accuracy of the information provided. Any forward looking statements contained in this article are based on Waddell & Reed’s outlook only as of the date of this material.