Don’t Sweat Volatility – Focus on the Big Picture

Greetings Friends,

I started working in financial services full time when I was 23. The date was January of 2000.

Since then I have seen plenty of volatility in the market.

For example, the Nasdaq stock bubble deflating and falling 70% in two years from 2000 to 2002.

The 911 terrorist attack that closed the US markets for a week. When the S&P 500 opened a week later it fell 9% in one day.

The housing bubble of 2007 that led to the financial crisis of 2008 when the S&P 500 fell 50%.

In the short run – all those events made investors extremely nervous. Including me. And rightfully so. Its scary to think about the global economy falling apart and stocks or bonds suffering big losses.

However – in the long run – history has proven that stocks are extremely resilient.

The S&P 500 has never failed to recover from a correction, bear market or even full on crash.

In fact, corrections are a totally normal part of the market.

According to a study from mutual fund company American Funds, from 1900 to December of 2014, a pullback of 10% or more happened about once every year.

Bear markets (more than a 20% decline) are rare, happening only once every 3.5 years.

Take a look at the frequency of corrections and pullbacks in the table below.


Even when the S&P 500 suffered its worst losses – like 2008 – stocks came roaring back.

Investors who held through short-term weakness profited from that rebound. Investors who bought more shares when the market was down did even better.

I want everyone to keep these lessons in mind this week.

Global stocks took a beating on Friday. The Dow fell 610 points. Take a look below.

The trigger point was the U.K.’s historic decision to leave the European Union.

Here are some great political cartoons that sum it up pretty well.

Why the Brits Really Voted Leave in 3 Simple Cartoons

That sharp decline has people on edge. I know because I’m getting a lot of phone calls and questions.

Here’s what everyone needs to know.

1.) The media loves getting people whipped up into a frenzy: The UK/ EU is big, real and important. It will have an impact on the market.

But keep in mind, the media loves getting people whipped up into a frenzy.

The media can’t wait to find the newest reason the world is going to end and how we’re all going to be sucked down a black hole.

Doom and gloom headlines are proven to get 20 times for clicks than regular headlines. The media has a clear financial incentive to promote doom.

Do not believe all the hype. The world is resilient. Just like the stock market.

2.) This is the beginning of the story – it will last for years: Does anyone remember Greece? Greece was at the top of the headlines for four or five years. It was a long and drawn out soap opera.

This is exactly the same thing.

Don’t waste your time trying to figure out how it’s going to effect the market.

Stocks will be down one day on bad news and up again the next day on good news.

In the long run – the stock market spends a heck of a lot more time going up than going down.

Long Term Investors: For longer term investors – 5 or more years – sit tight. Keep adding to your accounts and you’ll be able to capitalize on lower prices.

Short Term Investors: For short-term investors, volatility is a good time to make sure you have the right mix of stocks and bonds. Remember, bonds are good for capital preservation. They pay dividends. And they usually go up in value when stocks fall. Despite the recent hysteria, the S&P 500 is still trading near an all-time high. Its still a good time to take profit.

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I’ll be back in a few weeks with another update.

Your Investment Partner,

Mike

This report is for entertainment purposes only. Every investor should consult with an investment advisor before making investment decisions. The Vodicka Group, Inc. is not a broker/dealer. We do not receive compensation for mentioning stocks. At various times, the clients, publishers and employees of Vodicka Group, Inc., may buy or sell the securities discussed for purposes of investment or trading.

ABOUT THE AUTHOR

Michael Vodicka

Michael Vodicka is the president and founder of the Vodicka Group Inc., a licensed investment advisor (Series 65) and a financial journalist.