This is a reminder for the future. This is an essay you should save, to tuck in your back pocket and pull it out when the financial markets are going through their next down period.
Today, the weather is good and so is the stock market. Like the weather, the stock market can, and does, change suddenly.
The financial markets have been generally positive for the past few years. We do not know when that will change. We will not try to time the markets or try to predict the next downturn. That is not the point of this essay.
The main point is there will be future downturns in the market. They may not all be as severe as the October, 2007 – March, 2009 crisis, which caused the U.S. S&P 500 to be down over 50%.
But significant declines in stock markets occur more regularly than most people realize. Their occurrences are the norm, not the aberration. Declines of greater than 20% occur on average once every five years, since the end of World War II.
Within a given year, since 1980, intra-year declines have averaged over 14%. This means that while a calendar year may end up positive, at some point during most years there is a decline which averages 14%. This is volatility at work.
The key is that the overall progression of worldwide stock markets is upward, with temporary declines along the way. This should be your focus, especially when markets are heading temporarily downward.
Having the ability to handle the volatility of these market declines, and to stick with your stock allocation, is a key to successful investing. It is clear that those who understand this long term message, and have remained invested throughout the declines of the past, have been well rewarded.
So enjoy the good weather while it lasts. And enjoy the good stock markets, as they will return after the next decline passes through.