Why Market Price Volatility
is Irrelevant for You
Good Morning Relaxing Retirement Member,
In the last eight months, you have experienced firsthand why stock market price volatility is completely irrelevant.
Yes, after 28 years of careful study and hands-on work with hundreds of Relaxing Retirement members, I can unequivocally say that volatility is irrelevant for you.
So that we don’t confuse the issue, and jump to the conclusion that I’ve gone off the deep end, let’s first define volatility.
Volatility simply means price movement, down and up. You may expand that to mean unstable and unpredictable.
Please note that nowhere in the definition of volatility is the word loss or permanent.
The Last Eight Months
Time has a way of healing all wounds/memories, so let’s recall the journey of market price movements over the last eight months to beautifully illustrate just how irrelevant market price volatility is:
Episode #1 of particular interest was the last days of August, 2015.
In a matter of 5 trading days, the price of the broad market S&P 500 index fell more than 11% down to 1,867. (We could examine the price of other indexes, but to keep the incredible lesson simple, we’ll stick with the S&P for now)
You may recall the hysteria created by the financial media. During the week following this drop, an all-time record $29.5 billion was withdrawn from stock funds by investors with $19 billion coming on one day!
As they always have, market prices then corrected right back up through November.
Episode #2 was the price slide that began in late December and picked up steam in early January leading financial journalists to pronounce the beginning of January 2016 as:
“The Worst Five Days to Begin Any Year”,
“The Worst First Two Weeks of Any Year”, and
“The Worst 12 Days of Any Year Since 1929!”
Attaching numbers to this “catastrophe”, the price of the S&P 500 Index fell 6.1% in the first 8 days of 2016, and bottomed out on February 11th at 1,815 down 10.5% for the year, and down 13.2% from early November.
The End of the World was pronounced once again by the financial media and more and more Americans began to buy into the belief that the bottom was officially falling out this time.
As you now know, market prices once again rebounded back up again to close out on March 31st at 2,051.
That not only means that the “worst start to any year in history” was erased. It was erased in less than two months! And, the S&P 500 Index ended the first quarter of 2016 up 1.13%.
What We Can Learn From This
Experience is a wonderful tool….if we use it.
Every life event, good and bad, is just that unless we pause for a moment to document and learn from it so we can better prepare ourselves for the future.
- Expectation Level: If you enter the game with a proper expectation level, you won’t be spooked into making a cataclysmic mistake. By expectation level, I’m referring to the fact that since 1980, the average intra-year peak to trough drop in the price of the S&P 500 Index is 14.2%.
Translation: On average, market prices have temporarily fallen 14.2% at some point in the middle of the year over the last 36 years. I don’t think the importance of that fact can be stated enough times.
What this means is that you should expect market prices to temporarily fall, and fall sharply at times each and every year. That’s what market prices have always done. Why would they no longer do so in the future?
The two corrections detailed above that you have just lived through and experienced first-hand are perfect examples of this. Their effect on your long term goals is zero because they were temporary, not permanent.
- A Plan: If you enter the game with a carefully thought out and detailed plan based on your long term goals, you can sleep like a baby at night with total confidence.
If you know your level of Retirement Bucket™ dependence (how much you need to withdraw each year to maintain your lifestyle).
If you you keep sufficient balances in money markets and short term instruments to support your withdrawals without being forced to sell your ownership stake in companies in a temporary down market.
And, if you maintain disciplined asset allocation and an “ownership” mindset with the rest, market price volatility is 100% irrelevant for you.
- The Financial Media: The goals of the financial media are not your goals. Their goal is to keep you tuned in so they can sell higher and higher priced advertising space.
Next to a good old fashioned hurricane or blizzard, the O.J. slow speed Bronco chase, or a real national catastrophe like the events of 9/11, the greatest tool ever invented to assist the mainstream press with capturing your attention is the volatility of stock market prices.
They absolutely love it because it’s a great tool to scare the living daylights out of the average American who does not understand that market price volatility is 100% irrelevant for those with a plan.
If you didn’t panic out and you maintained your focus and discipline over the last eight months, take a bow! I sincerely congratulate you. Well done!
Know that you are in the minority.
While you’re taking your bow, don’t miss the opportunity to internalize what just occurred so you will be even more prepared the next time market prices correct and the mainstream press proclaims “this time it’s different!”
You will better prepared to laugh it off the same way Lamont laughed off his father, Fred Sanford’s, weekly proclamation while grabbing his heart, “I’m comin’ Elizabeth….this is the BIG one” in the hilarious sitcom Sanford and Son.
Committed to Your Relaxing Retirement,
The Retirement Coach
P.S.: WHO do you know who could benefit from receiving my Retirement Coach “Strategy of the Week”? Please simply provide their name and email address to us at info@TheRetirementCoach.com. Or they can subscribe at www.TheRetirementCoach.com.
I appreciate the trust you place in me. Thank you!
(The content of this letter does not constitute a tax opinion. Always consult with a competent tax professional service provider for advic