Volatility Is a Two-Way Street
Volatility is a two-way street – rising and falling unexpectedly. Most investors equate volatility with risk, but it's not. Stocks are volatile, explosive, and unpredictable whether they rise or fall. Over my thirty-year career, I have never received a call from a client concerned about a rising stock market. If stocks are up 300 points, no one calls to ask what's wrong? Why are stocks up? Investors love volatility when stocks rise, not when they fall. Like a roller coaster, riders only scream on the way down.
Stocks rise more than they fall, so investors feel entitled to positive returns, but something must be wrong when they drop. Since 2012, the S&P 500 has risen 80% of the time, generating an average annual gain of 14.8%, but they have been volatile. The average standard deviation over the past decade has been 20.5%. What does this mean? If the expected return is 10%, stocks could rise 30.5% or fall 10.5%.
Bonds, on the other hand, are less volatile than stocks. The annualized standard deviation for the Vanguard Total Bond ETF (BND) has been 3.52%, while the Goldman Sachs Treasury ETF (GBIL) averaged .29%.
You need to own stocks to grow your wealth, despite the volatility. Stocks are more volatile than bonds, but they provide generous returns. Over the past ten years, the S&P 500 returned 240%, bonds fell 2%, and short-term Treasuries rose slightly, barely breaking even. If you don't like wild gyrations in stock prices, buy T-Bills. T-Bills are considered the most secure asset in the world. If you allocate money to this asset class, expect low volatility and low returns.
No one likes to lose money, but if you own stocks, you will experience losses at some point. The losses could last days, weeks, months, or years. One of the best ways to protect your assets is to diversify your holdings across stocks, bonds, and cash. For example, the NASDAQ index is down 9.5% for the past three months, whereas a portfolio of 60% stocks and 40% bonds is only down 3.6%.
Time heals all wounds, and markets ultimately recover. Will this time be different? I doubt it. Be patient, focus on your goals, follow your plan, think long-term and good things will happen.
The true investor welcomes volatility – a wild fluctuating market means that irrationally low prices will periodically be attached to solid businesses. ~ Warren Buffett
February 9, 2022
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management, located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM's custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
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