Financial Planning, Millennials

Get Comfortable With Volatility

Volatility is a term that gets thrown around a lot and most times is associated with down swings in the market, but it can also describe positive increases in the market as well. However, these increases get talked about less because a bad day in the market makes you feel way worse than a good day in the market makes you feel good 🧐. I know that is confusing, but I think you get what I mean. 

How To Handle Volatility

If you are like most other millennials, you are relatively new to the investing world. With this inexperience, it makes it hard to make investment decisions when volatility occurs. Do you buy more? Do you sell? Do you ride it out? It’s a lot to figure out when it all is so new, and the media doesn’t make it any easier when they portray every fluctuation in the market as something bigger. One day the market goes up and we are in this new bull market that nothing can stop. Then two days later we see a sharp decline in the market and the media starts to say that we are in a recession and you need to move out of your stock positions. It’s so confusing, but you have to remember that the media makes money by driving fear which is why we hear more about the times the market sees negative volatility. 

I want to give you some advice to help make things a little bit easier, stop looking at the news and your investment balances everyday. Market volatility is going to happen, but that doesn’t mean you need to make any changes to your portfolio or plan at that moment. You never want to make rash decisions when emotions are heightened. It rarely leads to good results.  

Let’s look at some data to help prove the point — so, the stock market on average saw returns of 10% per year over the last century (nerdwallet.com). Pretty good right? I think so. I know I personally would be happy with a 10% average return over my lifetime. However, the thing many don’t realize is that it was not a steady increase to a 10% gain per year. The market actually looks a lot more like the chart below from Visualize Value (created by Jack Butcher who you should all follow at this point). 

Overtime, the markets end up higher but that is not without dips in the middle. When we talk about averages, you only think about it ending up 10%, you do not at all see the market fluctuations that happen in the middle. You have to remember that the stock market does come with risk. If there was no risk/declines involved, there would not be an average return of 10% a year. 

Now, you might be thinking, okay well how much variance/volatility is normal? Well, let’s look at the chart below and see how many times a year over the last 14 years the market saw a decline of over 2% in one day. 

As you can see, in most years there were multiple days where the market saw a decline of at least 2%. Some years even had over 20 days where this occurred. Look at 2020 for example, there were 25 different days that saw declines of over 2%, yet in the end, if you stayed invested, you would have ended up with a return of 15.76% 🤯. 

Reframing Your View On Volatility

I want you to realize that as a millennial, volatility is actually your friend. Downturns should not scare you, they should excite you since you now get to buy those stocks at a discount — and if you are someone that is sitting on too much cash, use these dips as opportunities to move more money into the market (this is not me telling you to try and time the market, I just know plenty of people that are sitting on cash and waiting to invest. Dips in the market are a great opportunity to do so).

The moral of the story is to get comfortable with volatility. The stock market is going to continue to have some very good and some very bad days. You can’t control it, you just have to get used to it, continue to stay invested, and stick to your plan.

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Disclaimer: Nothing on this blog should be considered advice, or recommendations. If you have questions pertaining to your individual situation you should consult your financial advisor. For all of the disclaimers, please see my disclaimers page.