Market volatility: a natural occurrence

Periods of market volatility, like we have seen recently, can be a challenging time for investors, particularly those without a clear plan. The headline world we live in exacerbates that feeling of fear as the media reports excitedly about “stocks plunging” or “equity markets crashing”. 

The reality is that over the long term (greater than 25 years) these market moves look much less frightening. The 1987 crash, when the Dow Jones Index fell 22% in one day, is just a blip on a long term chart. Equities over the long term have been the best performing asset class, but that comes with the type of volatility we have seen in recent weeks.

Remember it is the irrational nature of market participants that causes financial markets to be so volatile. The performance of equity markets over the last few years fueled unrealistic expectations and investors once again began to focus solely on chasing return. The S&P 500 was up 30% in 2013 yet the long term expected return of equity markets is 6-7% on average.

Investors unable to stomach the type of gut wrenching moves that have become the norm in equity markets – the S&P 500 fell 53% over the Oct 07-Mar 09 period – must also be willing to accept the opportunity cost that comes with diversification when the equity market is far outperforming other asset classes.

Focus on your own risk and return objectives and the appropriate investments that meet your criteria. Lamenting missed opportunities in equity markets is pointless if you are unwilling to take the risk to begin with. You will always be disappointed if you focus more on the riches of your neighbour than what you have yourself!