Be Ready for Declines

Volatility and declines are a natural part of public markets. Don't let that get in the way of capturing the returns markets offer


Last week we looked at the history of reasons not to invest, and how the current reasons are not all that different from those in prior decades. This week we stay focused on that concept but turn to data. Large declines are a constant in equity prices. volatility is a near certainty when you have a risk asset that is tradable all day every day. While this price volatility increases the chances investors make emotional link mistakes. Outside of this element, a well diversified portfolio of stocks are no more risky than illiquid assets with the same potential for return. Seeing the price change daily can suck us into thinking we should be managing our investments more frequently. Like many things in life, there's likely an inverse relationship between how often we change and how successful our investment portfolio will be. This graph looks at annual declines from the s&p with the red dots showing

The lowest point each year, and the gray bar showing the return that year, on average, there was a 13.8% drop. Despite this drop, the s&p finished with positive returns 30 out of those 40 years, this year's 34% decline in near full recovery looks consistent with the last 40 years to be successful capturing the future potential returns for equities. You not only have to be ready to ignore the crisis of the day, but also fairly frequent declines in portfolios.

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