4 Things You Should Know About Market Volatility

From 1970 through 2010, the S&P 500 had positive returns in 31 of 41 years.

By + More

SmarterInvestor_Bold.jpg
Adam Bold
At this point, you may still have whiplash from the stock market's August roller coaster ride. Sharp market declines can be challenging to endure. Here are some things to remember the next time we experience volatility in the market:

Down days are normal. Sometimes it feels like the market does nothing but drop, but that's just not true. In the 41-year period through 2010, the S&P 500 Index was down an average of 119 times a year, or 47 percent of all trading days.

[In Pictures: 6 Numbers Every Investor Should Follow.]

It's tempting to think the last 11 years, which included two bear markets and 2010's Summer of Fear, incurred more down days than normal. They didn't. On average, the market closed down 119 days a year during that time, which is just about what happened every year since 1970.

Really, the market's daily movements haven't changed much over the past 40-plus years. For the first half of that period—1970 through 1989—the market closed down 48 percent of the time. In the second half—1990 through 2010—the market closed down 47 percent of all trading days.

You know what's really different about the stock market today? Media attention. It wasn't that long ago we had to wait until the morning paper hit the driveway to check stock performance. Today, market movements are all over the cable business channels and Twitter. This availability magnifies the importance of the swings in our minds.

[See Are ETFs to Blame for the Rise in Volatility?]

Frequency of down days doesn't dictate annual performance. Just because you hear reports that the market closed down for several days in a row, it doesn't mean that it will be a bad year for stocks or that anything unusual is going on. It's easy to fixate on market declines, but there is no reason to. Daily fluctuations are not indicators of annual performance.

The market typically finishes up in any given year. Regardless of the number of down days in any given year, the market typically finishes up for the year. From 1970 through 2010, the S&P 500 had positive returns in 31 of 41 years. The market tends to trend upward despite sometimes offering a rough ride along the way.

Daily ups and downs shouldn't affect your long-term investment plan. Intellectually, it's easier to recognize that daily movements, including big down days, don't have much impact on your long-term investment plan. Emotionally, it's more of a challenge.

[See 50 Best Funds for the Everyday Investor.]

The first decade of this century—2000 through 2009—was a rare 10-year period when the S&P 500 had a negative average annual return. But it's not logical to use the last decade to predict what the market will do in the future. Your goals and personal situation aside, don't allow what we've experienced in those 10 years to affect your long-term investment plan.

Remember, investing isn't always going to be a smooth or pain-free ride. But history shows us the next wave of down days has little to do with what the market does the rest of the year.

Adam Bold is the founder of The Mutual Fund Store, which provides fee-only investment advice with locations coast to coast. He's also host of The Mutual Fund Show, a call-in radio program broadcast across the country. Bold is author of the book The Bold Truth about Investing (April 2009). Bold is Chief Investment Officer of The Mutual Fund Research Center, an SEC-registered investment adviser, which provides mutual fund and asset allocation recommendations, and research to stores in The Mutual Fund Store system.