Stock prices have collapsed 8-10 percent in just the past two weeks — an unprecedented slide for a start of a year.
But at least one local expert says there’s no need to panic.
“The stock market is much larger and much more volatile than it was 10 or 15 years ago, and it’s sensitive to daily swings of 300 or 400 points,” said Bill Wood, a certified financial planner and a partner at The Advisory Group in Centerville. “That sounds dramatic, but it sounds a little more dramatic than it really is. When you look at volatility over the long term, we’re actually not that much more volatile on an annual basis.”
Wood pointed out that despite a global stock market sell-off last summer that sent the Dow careening more than 500 points on Aug. 21, all the major stock market indices closed 2015 essentially flat after a late-year rally.
Wood said “the only people who made money” in the stock market last year were investors in 401(k) accounts and cash investors who bought the dips, or invested in stocks during market slides. He advises anyone with money still invested in stocks though a 401(k) to not only stand pat on their investments but continue to make regular contributions.
“If you’re in a 401(k), you’re putting some percentage of your salary in every two weeks, and when you do that, you’re going to catch these down days,” he said, referring to an investment strategy known as dollar-cost-averaging, which reduces the risk of volatility by spreading the total sum invested out over time rather than as a lump-sum investment that could be poorly timed.
But Wood acknowledged the strategy can be hard to digest for nervous investors.
“Dollar cost averaging is a very powerful investment strategy,” he said. “But many people say, gee, you want me to continue to buy stocks when they’re going to go down next week. Well, the answer is yes, absolutely, because you don’t need the money next week. You need the money 10, 15, 20 years from now; and there’s no chart that you can look at that doesn’t show that over the long-term, staying invested in the market will make you money.”
Over the past 12 months, an investor in an S&P 500 index fund has lost more than 6 percent, including dividends. But over five years, they are up a total of 60 percent, and over 10 years, they are up 79 percent.
Still, vicious drops in the market feel even more unsettling because they’re such a departure from the placid and strong returns that investors had been enjoying for years.
It wasn’t until this past August when the S&P 500 snapped into its first correction in nearly four years, felled by concerns about China’s slowdown and the fragility of the global economy.
But the remarkably calm stretch from late 2011 through last summer was an anomaly, said Bill Barker, portfolio manager at Motley Fool Asset Management, whose three mutual funds control about $600 million.
“It was easy for many years,” Barker said. “That was not an accurate display of what happens in the market all the time.”
The painful return of big price swings serves as a reminder that investing in stocks can be harrowing, especially if investors focus on the day-to-day moves.
Now investors just need to get used to it, according to many analysts, who expect the volatility to continue.
Besides China’s sharp economic slowdown, analysts see other reasons for volatility to continue. Tensions in the Middle East are high, and the plunge in prices of oil and other commodities are raising concerns about global economic growth and decimating the profits — and share prices — of materials producers.
What makes the volatility even more painful to endure is that many analysts are forecasting stock returns to be lower this year and in the coming years than in the recent past. So investors are facing the prospect of higher risk without much higher reward.
The forecast for big swings could encourage some investors to try to time the market, attempting to jump in to catch stocks when they’re rising and jump out during downturns. That’s usually not a good idea, even for pros. Strategists at Goldman Sachs’ investment management division wrote in a recent report that it’s better to remain a long-term investor, and not become a short-term trader.
“The vast majority of traders — including most macro hedge fund traders — have failed to capitalize on such moves,” the strategists wrote.
The Associated Press contributed to this story.
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