How To Fly Through Market Volatility

I’ve never really minded flying. I enjoy the anticipation of going somewhere, the people watching, the exhilaration as the wheels leave the tarmac, the only occasion on which I will order a ginger ale. As I settle down into a book or movie, at some point I forget I am at a cruising altitude of over 30,000 ft. I forget until inevitably the plane lurches, my stomach drops and my nerves are rattled as the flight encounters turbulence. When experienced, turbulence can cause even seasoned travelers to lose their cool demeanor as they begin planning their exit strategy if worst comes to worst. When investing even the most seasoned investors can have a similar response when experiencing volatility.  

Whether investing or flying, it is important to ask 3 questions: WHERE ARE WE? WHERE ARE WE GOING? WHAT IS NORMAL?

WHERE ARE WE?

Since 2009 the S&P 500 has taken off, up over 200% (As of 12.01.2018).

 Yahoo Finance

Yahoo Finance

However, 2018 has provided turbulence for investors that have caused questions about how to navigate.

 Yahoo Finance

Yahoo Finance

WHERE ARE WE GOING?

Once we assess where we are, it is important to focus on where we are going. Each flight has a flight plan and in that flight plan a destination. It’s important to know where you’re going whether in an airplane or with an investment account. Asking yourself, “What are these dollars for?” is a great way to assess your plan and savings timeline.  

savings timeline.png
  • Do you need to save for this year’s holiday season to avoid taking on an additional $1k in debt?

  • Are you saving for the down payment of a home in the next 3-5 years where a high-yield savings account may be appropriate?

  • Are you saving for retirement where the time horizon is 10, 20, 30, 40 years in the future?

Knowing where you are going can help calm nerves on a plane or in financial markets and may also prevent you from abandoning ship before you get to your destination. No matter your goal or timeline it is appropriate to have a plan. It is also essential to check in to make sure you are staying the course. Sometimes this takes a call to ground control to assess.

WHAT IS NORMAL?

Finally, What’s normal? “From our perspective, turbulence is, for lack of a better term, normal,” said commercial pilot Patrick Smith, host of AskThePilot.com. Comforting to know from someone who spends their working days with their head in the clouds. Like turbulence, market volatility isn’t comfortable yet it’s normal.

What’s normal in the financial markets? Over the last 38 years, the S&P 500 has shown a positive annual return in 29 times. Meaning 76% of the time the market has finished positive on the year despite intra-year volatility and declines.

  Source: ImageFactSet, Standard & Poor’s,    J.P. Morgan Asset Management    - Guide to the Markets.    Returns are based on price index only and do not include dividends. Intra-year drops refer to the largest market drops from a peak to a trough during the year. For illustrative purposes only. Returns shown are calendar year returns from 1980 to 2017. Over this time-period the average annual return was 8.8%. U.S. Data is as of October 31, 2018.

Source: ImageFactSet, Standard & Poor’s, J.P. Morgan Asset Management - Guide to the Markets.

Returns are based on price index only and do not include dividends. Intra-year drops refer to the largest market drops from a peak to a trough during the year. For illustrative purposes only. Returns shown are calendar year returns from 1980 to 2017. Over this time-period the average annual return was 8.8%. U.S. Data is as of October 31, 2018.

So what we are experiencing in 2018 is normal and with an average annual return over the last 38 years at 8.8% there is a strong case for the long-term investor to be disciplined and stick to the plan.

In summary ask yourself (or ground control):

  1. Where are we?

  2. Where are we going?

  3. What is normal?

These questions can help stay the course and not panic, even when your stomach drops. If you find yourself traveling this holiday season and need additional help overcoming a fear of flying see this practical guide. If you find you are flying toward retirement and find you need help building a financial plan lets us know, Human Investing is happy to help.

Will Kellar