When listening to news stories about recent volatility, it’s important not to let the reporter’s mission of communicating what happened that day deter from your long-term investment perspective. Often reports center on news that simply does not matter for a properly diversified portfolio. Yes, the Dow Jones Industrial Average may have fallen that day, but the market fundamentals have not changed. Especially in times where volatility spikes, it is even more important to distinguish between market performance that stems from short-term news rather than long-term fundamentals.
Think back to October 19, 1987, or “Black Monday,” when the S&P 500 plummeted 20.5%. Notably, the worst day on record for the stock market was a result of trading behavior, not underlying economic fundamentals. Although the fall was steep, the S&P 500 recovered to end the year with a slight gain. And investors who stayed invested during those few months were rewarded. More recently, in 2014 we saw a market pullback, when the market fell 7.4% during October over a variety of global concerns. Yet, performance was positive by the end of the year.
This chart from J.P. Morgan shows that despite average intra-year declines of 14.2%, annual returns for the S&P 500 were positive in 27 over the last 35 years.
This certainly provides encouragement to keep your eye on the long-term. Changes to portfolios should be driven by changes in market fundamentals and changes to your own investment goals, not by over-reactions to the news of the day.