Consistency is not a word that first comes to mind in these crazy times that we live in. It seems as though the only consistent thing in today’s world is the fact that everything seems so inconsistent. I mean on celebrity slapping another celebrity, really? What has this world come to?
Of course, it got me thinking about our clients. How are you feeling about today’s investing climate?
We’ve heard from a few of you, and invariably when we discuss what’s happening in today’s world, we’ll often hear this comment: “The markets are so volatile right now, when do you think they’ll return to normal?”. A tough question to answer for sure, because I’m not sure that there is, or ever was a “normal” time for equities. What does “normal” even mean anyway? If investors mean “normal” as in the “normal” but sometimes scary ups and downs of the equity markets, then we are currently in “normal” times. If you mean “normal” as in equities having little or no volatility, well then, you’re not talking about investing. You’re talking about mattresses and mason jars. It’s apples to oranges.
Like it or not, volatility has always been, and will always be the price of admission to the investing arena. In order to achieve the superior long-term rates of return that your financial plan wants, needs and expects – volatility is a necessary evil.
Volatility is always present, and it stops for no one portfolio. Take a look at this chart:
Source: Craig Isarelsen
Here we look at the last 45 years of performance and volatility using the S&P 500 Index and the iShares Core U.S. Aggregate Bond ETF. It looks at the entire spectrum of investing from 100% in the S&P 500 to 100% in Aggregate bonds, and measures the standard deviation (standard deviation is the mathematical term for “volatility”, the higher standard deviation, the more volatility you can expect) for each portfolio.
Did you notice a pattern there? I did. Here’s what I see in that previous chart – Volatility is a function of return, the greater the potential for return, the greater the potential for volatility.
Now, in this next chart let’s expand our frame of reference. Let’s look at volatility over a 5-Year holding period, where the first block is 1976-1980, the second is 1981-1985, and so on, and what do you know? Yup, another pattern emerges here:
Source: Craig Isarelsen
Sure, enough - turns out that each five-year period over the last 45 years, produces the same “pattern” of the relationship between volatility and investment results. Turns out the volatility patterns of certain asset allocations tend to be fairly consistent, and well behaved. I don’t see any signs of maddening inconsistency in the level of volatility in that chart, do you?
Meanwhile the reasons (real or otherwise) that create the volatility, turn out to be more inconsistent than the actual outcomes from that volatility, take a look at this, because there is ALWAYS a reason to sell your investments, and yet . . .
The S&P 500 Index keeps marching onwards and upwards, despite the repeated efforts of the financial media trying to scare investors out of their financial goals. Turns out the equity markets simply don’t care about whatever reasons (real or otherwise) the media tries to get you to believe.
In short, when it comes to the equity markets getting back to “normal”, they’ve always been normally volatile, but the REASONS for that volatility are what change. Beware of those people who try to scare you into their way of thinking, because history has proven that the sometimes maddening ups and downs of the equity markets are just the equity markets doing equity market things.
Thanks for reading!