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Volatility is Back

October 14, 2014
 
Professional investors know something that most people find impossible to believe: that the threat of scary ups and downs in the markets is by far the best friend of the long-term investor.  Why?  Because over the long term, stocks have provided returns far higher than bonds or cash.  If it were not for the occasional dizzying gyrations, any rational investor would put his or her money where the highest returns have been.  Right?
 
This appears to be one of those times--a time when non-professional investors are reminded of the reasons why they have this lingering fear of the stock market.  Since the end of September, the S&P 500 index has done something regularly that it normally does infrequently: moved more than a full percent up or down in a single day.  Consider the recent pattern this month:
 
Oct. 1   -1.3%
Oct. 4  +0.05%
Oct. 5   +1.1%
Oct. 6   -0.2%
Oct. 7   -1.5%
Oct. 8   +1.8%
Oct. 9    -2.1%
Oct. 10  -1.1%
Oct. 13  -1.65%
 
Contrast this to the calm before the storm: earlier this year, the markets experienced 42 consecutive days without a single 1% price move.
 
The question we should be asking ourselves is: why are we paying such close attention to daily market movements?  Why are we allowing ourselves to fall for the trap of getting anxious over short-term swings in stock prices?
 
The thing to remember is that the daily price of your stock holdings are determined by mood swings of skittish investors whose fears are stoked by pundits and commentators in the press, who know that the best way to get and hold your attention is to scare the heck out of you.  What they don’t say, because it’s boring, is that the value of your stock holdings are determined by the effectiveness of millions of workers who go to work every day in offices and factories, farms, warehouses, power plants and research facilities, who slowly, incrementally, with their daily labor, build up the value of the businesses they work for.
 
The last time we checked that incremental progress has not stopped.  The economy is still growing.  You will not get a daily report on the value of the stocks you own; only the daily, changing opinions of skittish investors.  However, if you take a second look at the growth of an investment in stocks over the long-term, you get a better idea of how that value is built over time, no matter what the markets will do tomorrow.
 
Rest assured that planning has been done to know where your retirement cash flows are coming from. In the short term, none is required to come from the stock portfolio you own. Cash, bonds, and interest payments from these will provide required income generally over the next several years. The stock portfolio will provide growth and inflation protection over time. This longer-term runway for stocks allows the short-term gyrations to become relatively meaningless and allows long-term value to be realized.
 
Be disclipined. Focus on what you can control and ignore the rest.
 
Kevin Kroskey, CFP®, MBA
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