In case the past month’s volatility was just a warm-up, you might want to reflect on the power of some basics the tumult brought to light. You could think of them as investing mantras for volatile markets. Volatility is normal
A six-year bull run without that many big blips may have made a fairly steady ride feel like the new normal. As financial planner Harold Evensky reminded clients in August, “After an extended bull run, many investors forget that it is normal for stock markets to periodically see intra-year declines in the 5 to 10 percent range.”
Intra-year drops of 5 percent from peak to trough, Evensky added, happen on average about four times a year, with a recovery period of two to three months. The drops can take place over days, weeks, or months, according to JPMorgan’s Asset Management Guide to the Markets. Investors see 10 percent declines about once a year, on average, followed by a recovery period of about eight months.
Moral to that story: The recent market swings were pretty hellacious, but it was the lack of volatility for long stretches that was really abnormal. You’re dollar-cost averaging into the drops
If you have a percentage of your salary deferred into a 401(k) or other automated investing program, you are buying into the market at regular intervals, regardless of its level. All that steady dollar-cost-averaging, year after year, means you’re never buying a big stake at a market high (or, it’s true, a market low). As Matt Levine of Bloomberg View put it in an Aug. 24 column, ”Lower prices reduce the value of our current pile, but also cheapen the rest of the pile which we have to buy in the future.”
A bonus: If you ever beat yourself up for not acting on the temptation to buy on the market dip, you probably did anyway, through your 401(k). You might not feel quite as joyful about the market’s plunge as Felix Salmon, but you may have picked up some bargains. Limit orders can limit the pain