Subscribe

Will calm seas last for the stock market?

The stock market has been pleasantly stable over the past five months, but such low volatility is rare in today's stock market environment. 

  • close
    A trader looks up at his screen as he works on the floor of the New York Stock Exchange shortly before the closing of the market in New York.
    Lucas Jackson/Reuters/File
    View Caption
  • About video ads
    View Caption
of

There are two questions I’d like you to consider. First, would you say you have thought about your investment portfolio more, less, or the same amount as usual during the last five months? Second, do you know how much the stock market has either increased or decreased in value over the last five months?

Of course, there will always be certain investors who take pride in following the market meticulously or simply just enjoy doing so. But I’d contend that a high percentage of investors have thought less about their portfolio during the last five months than they normally would. Further, I’d argue that more investors than usual are unaware of whether the market has gone up or down during the last five months and by how much.

Why is this? Have our work or retirement schedules kept us busier than normal over the last five months? Not likely. We’ve certainly been concerned about ISIS, hurricanes, what Scotland would do, and wars in Israel, Iraq and Ukraine, but is it the additional anxiety from those events that has prevented us from following the stock market? Probably not. So why are fewer of us than normal aware of what the market has done lately?

Recommended: Seven rules for tech investing

Quiet movements

A common adage is that negative events happening over a short period of time capture the headlines, while progress happening over an extended period of time commonly goes unnoticed. How many headline-worthy days of large market movements have occurred during the last five months?

Amazingly, between April 17 and Sept. 23 (110 trading days), the S&P 500 has either increased or decreased in value by more than 1% during only four trading days:

Date                       S&P 500 Return
7/17/14                 +1.19%
7/18/14                 -1.03%
7/31/14                 -2.02%
8/08/14                +1.11%

That’s a period of more than five months during which the market experienced a significant movement (defined as 1% or more either up or down) only four times, or only 3.6% of the time! A period of such low volatility is especially rare in today’s market environment. By comparison, since 1950, the S&P 500 has moved more than 1% by the end of 20% of all trading days. Moreover, all four significant movements during the last five months occurred within an approximately three-week time frame, between July 17 and Aug. 8. If we exclude that three-week period, we would have four and a half months during which the market had no trading days resulting in significant movements.

It’s interesting to recognize that although the market hasn’t experienced many significant daily movements over the last five months, it has changed in value considerably over the time period as a whole. In fact, from April 17 through Sept. 22, the S&P 500 has actually increased in value by 7.28%. Simply, a low volatility environment where the market consistently obtains small daily positive returns has been quite advantageous for investors, despite having few days of large gains.

Looking ahead

So what investing lessons can be taken from this pleasant five-month period? First, I’d encourage investors to not get too comfortable. Remember that the last five months have been a period of unusual stability in the investment markets and such low levels of volatility cannot continue in perpetuity.

Of course, this is not necessarily a bad thing—we expect a level of risk when investing in stocks, and it is ultimately the presence of risk that enables appealing returns in the long run. Consequently, the return of volatility should not frighten investors and certainly should not be interpreted as a signal to alter your long-term investment strategy.

Finally, allow me to pose one last question: Regarding financial and investing matters, have you been more, less, or equally happy compared to the norm during the last five months? Studies indicate that if you have been thinking less about your portfolio, you have likely enjoyed reduced levels of stress and increased levels of happiness. Why not learn from this experience and attempt to think less about your investment portfolio when a normal amount of volatility returns to the market?

Remember that your portfolio was constructed with a focus on the long-term and that short-term volatility is ultimately inconsequential. Consequently, regardless of day-to-day market movements, you should worry less about your portfolio and focus on the things that make you happy.

The post The Upside of a Slow and Steady Stock Market appeared first on NerdWallet News.

The Christian Science Monitor has assembled a diverse group of the best personal finance bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link in the blog description box above.

About these ads
Sponsored Content by LockerDome
 
 
Make a Difference
Inspired? Here are some ways to make a difference on this issue.
FREE Newsletters
Get the Monitor stories you care about delivered to your inbox.
 

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...

Save for later

Save
Cancel

Saved ( of items)

This item has been saved to read later from any device.
Access saved items through your user name at the top of the page.

View Saved Items

OK

Failed to save

You reached the limit of 20 saved items.
Please visit following link to manage you saved items.

View Saved Items

OK

Failed to save

You have already saved this item.

View Saved Items

OK