Nobody minds market volatility when it’s in the upward direction. But this week, we got plenty of the type of volatility that we don’t like so much as investors, the kind that inspires headlines with words like “plunge” and that end with exclamation points.
It presents an opportunity, therefore, to remind ourselves of one of the central tenets of the art and science of investing:
You can’t get outperformance without underperformance.
Indeed, the only reason we have a right to expect a higher rate of return on any given investment is that we’re willing to endure greater risk, and, in all likelihood, higher volatility. But just how much volatility?
Let’s look at some of the scariest market moments of the past 50 years, specifically how far the market—in this case, the S&P 500—dropped over a handful of notable time periods:
“As you can see, we’re experiencing rough air at the moment. But as a reminder, we can’t predict rough air,” said the Delta airline pilot ferrying me from St. Louis to Charleston (via Atlanta—always Atlanta), “so please keep your seatbelts on whenever you are seated.”
Thank you, sir, for giving me precisely the hint of inspiration I needed to frame this week’s note of encouragement while in the midst of one of the crazier market stretches we’ve seen in a couple of decades!
DANIEL ROLAND/AFP/Getty Images
Of course, statistically speaking, this bout of stock market extremism is more the norm than the exception. No, it’s not particularly normal to have thousand-point-up or -down days for the Dow Jones Industrial Index. But volatility—market ups and downs—is, indeed, more typical than placid markets.
One of the very few market predictions I (or anybody, for that matter) can responsibly make:
The market is more likely to be volatile than not.