While stocks can be volatile, especially in response to major domestic or world events, historical market data show that prices typically have returned to less volatile patterns over time. That can be good news for long-term investors.
But slow worldwide economic growth, as well as the uncertainty caused by government fiscal and monetary policies and political unrest around the world, still prompt many investors to look for ways to reduce risk.
When it comes to the stock market, volatility typically refers to the size and frequency of price movements. In general, higher volatility means a wider range of potential returns and the possibility of sharp movements 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 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. And 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 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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Past performance is not a guarantee of future results. The opinions expressed are those of Waddell & Reed Investment Management Company and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through the date of publication, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. Investment return and principal value will fluctuate and it is possible to lose money by investing.