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How has this year’s market volatility reinforced the importance of having an investment philosophy? Thumbnail

How has this year’s market volatility reinforced the importance of having an investment philosophy?


  • In most endeavors, there are things you can control and things you can't. That's true in life. That's true in business. That's true with investing. The good news about investing is that markets have rewarded investors over the long term. But over the short term—as anyone who has paid attention to markets knows—markets go up and markets go down, and we have seen this to an extreme through the first half of 2020.
  • Ben Carlson of Ritholtz Wealth Management has published blogs1 to provide some perspective around the turbulent market we've experienced thus far this year - a few staggering data points below:
    • We've experienced 3 of the worst 25 losses and 2 of the largest 25 gains for the S&P 500. 1 
    • We experienced the fastest bear market in history, in which it took just 16 trading days for the S&P 500 to close down 20% from a peak. It took only 19 trading days for the S&P to plummet 30%.3
    • The annualized daily volatility of the stock market this year is close to 50%. For comparison purposes, the standard deviation of daily returns in 2019 and 2018 were 12% and 17%, respectively. 2
    • There have been 35 daily gains or losses of 3% or more this year. Over the past 5 years, there have been just 11 moves of 3% or more in total. 2
    • There wasn’t a single daily gain of 4% or more from 2015-2019. This year there have been 8 such moves including 5 days with gains of 6% or greater.2
  • This volatility should not deter us from investing, but rather highlight the importance of looking beyond short-term returns and being aware of the range of potential outcomes. 
  • Since 1926, the US stock market has returned 10% a year on average, but the road to 10% can be bumpy. Returns in any given year have ranged from as high as 54% to as low as -43%. In fact, the S&P 500 had a return within plus or minus 2% points of this 10% average in only 6 of the past 94 calendar years.4
  • This uncommon average of the stock market reminds me of the uncommon average associated with LeBron James. LeBron has averaged 27 points, 7 assists, and 7 rebounds a game during his entire career. He’s played in over 1,400 NBA games in 16 years and has yet to finish a game with exactly 27-7-7.5
  • Dimensional Founder and Executive Chairman David Booth stated "The important thing about an investment philosophy is that you have one you can stick with." Recent volatility and disappointing results have tested many investors faith in sticking true to their investment philosophy, but we know that reacting emotionally to volatile markets may be more detrimental to portfolio performance than the drawdown itself.
  • While there is no silver bullet, understanding how markets work and trusting market prices are good starting points. By adhering to a well-thought out investment plan, ideally agreed upon in advance of periods of volatility, investors may be better able to remain calm during periods of short-term uncertainty.