As we prepare for basketball’s march madness tournament, it is a good time to reflect on how maddening the stock market can be.
What causes the madness of the markets? Many things, but one of the greatest frustrations to investors is the significant fluctuations in asset prices.
These fluctuations, also known as volatility, are driven primarily by dire and urgent headlines, spurious market and economic forecasts, and our own emotions. But such volatility is normal!
History of Market Volatility
For example, since 2018, just in the last 5 years, we have experienced three bear markets.
Going back 15 years to include the Global Financial Crisis, we experienced even greater volatility.
If you had invested right before the financial crisis, your portfolio would have been cut in half and you would have experienced three additional bear markets. Yet, for investors who stayed the course, they still would have earned 345%, or 9.5% annualized returns.1
Final Thoughts
Volatility, even extreme volatility, is normal. While it can affect short-term returns, earnings have historically driven long-term returns. Patience, discipline, and taking the long view can help you weather the occasional bouts of volatility.
© The Behavioral Finance Network
1. Source: A Wealth of Common Sense, Feb 27, 2024