Whiplash is a neck injury due to forceful, rapid back-and-forth movement of the neck, like the cracking of a whip. Sound like our investment markets recently? Like whiplash, volatile market fluctuations may cause pain, stiffness, and headaches, especially if you enjoy following every day’s market fluctuations. Interestingly enough, the remedy for both is also similar – patience and rest while the injury heals. (Note: this is not intended to be used as medical advice for whiplash!) This can be hard to practice as we watch the markets hurl themselves in completely opposite directions almost daily. In the past month alone we’ve seen the S&P 500 decline nearly 3% from Aug 2 – 5th, only to be followed by a rebound of 3.3% from Aug 5th to the 8th*. When the average annual return of the S&P 500 from 1960 – 2018 is 9.8%**, these moves represent nearly a third of the total annual return. Little wonder they shake the markets.
At Dolan Capital, we prefer to use data analysis to guide our investment advice. From this data, we know that trying to time the ups and downs of the market is futile – albeit tempting. To help you avoid this temptation we have attached a graph showing the impact on performance if you remain invested vs. missing a few days of strong market return (see below). Of course, we know logically the reverse is true – if you can reliably predict which days are going to be one of those 3% loss days. Or maybe it’s one of those days that drops precipitously in the morning only to rebound by market close.
To make this even more difficult, statistically volatile positive and negative days occur close together. The 4 days between February 6, 2018 and Feb 9, 2018 recorded three of the four largest intraday point swings for the S&P 500. On Feb 6 and 9th the markets closed up over the intraday lows by 3.9% and 3.4%, respectively, while on Feb 8th the S&P 500 closed down from the intraday high 3.9%. All three days saw intraday swings of over 4%*. Does anyone even recall this? Probably very few.
The markets will survive trade disputes, political rhetoric, and inverted yield curves. Market downturns are a normal part of investing and your portfolio will experience many of them. Our advice, given the current market environment: patience and rest.
*Intraday data for this article provided by Yahoo Finance
**Return data provided by Morningstar