Perspectives on Volatility

Posted 18 Oct 2018 by Rick Irwin, CFP, CLU

Looking at the attached chart, which shows the annual returns for the US stock market since 1981 we can see that in a period spanning close to 40 years where the S&P 500 made 8.8% on an annual basis there were only 8 of 38 years that were negative despite annual pullbacks of nearly 14% on an intra year basis. In other words, temporary pullbacks are virtually an annual occurrence. Since 1928, the index has typically suffered a 5% pullback once every 71 trading days. 69 trading days elapsed between 5% drawdowns prior to the drop on October 10, 2018.

Will your emotions hijack your investment strategy?

Since 1928 the US stock market has had 325 days where the losses were 3% or worse, which works out to about 1.5% of all trading days (or 1 every 67 days). In the last 20 years, the S&P 500 was down more than 2% on average 11 times per year. Each one of these down days feels as bad as the last one we all forgot about. So even while they are not pleasant to endure, down days are a part of the normal cycle of events and should not be seen as anomalies.

In fact, what has been abnormal recently is the lack of volatility. 2017 was the least volatile year in the history of the US stock market (as measured by the S&P500). The worst intra year drop in 2017 was just 3%. Only twice in the last 38 years has the worst intra year drop been less than 5%. Market volatility has increased this year but is still well below average.

Investing is not easy. It takes patience and perseverance and, while easier said than done, keeping our emotions in check when things are both flying high (FOMO! “fear of missing out”) and when things get bumpy. Your investment portfolio was designed with your long-term goals in mind and achieving those goals involves taking on some stock market risk. Hopefully the information above provides some context for just how common these market corrections are. Despite the frequency of annual intra year corrections that average 14% peak to trough the US stock market has averaged almost 9% annually the last 40 years. If you would like to review your investments, do not hesitate to contact us at any time.


1FactSet, Standard & Poor’s, J.P, Morgan Asset Management
2Bloomberg, RBC GAM. Data from January 1, 1998 to October 10, 2018
3Goldman Sachs Global Investment Research