Volality and Long-Term Investing

October 20, 2014

Professional investors know something that most people find impossible to believe: that the threat of volatility (ups and downs in the markets) is by far the best friend of the long-term investor.  Why?  Because over the long term, stocks have provided returns far higher than bonds or cash.  If it weren’t for the occasional volatility, any rational investor would put their money exclusively in stocks where they historically can experience the highest returns.

This appears to be one of those times–a time when non-professional investors are reminded of the reasons why they have this lingering fear of the stock market.  So far in the month of October, the S&P 500 index has been on a bit of a roller coaster ride.  For the first time in many months, we have seen movements of a full percent up or down in a single day.

Earlier this year, the markets experienced 42 consecutive days without a single 1% price move. The question we should be asking ourselves is: why are we paying such close attention to daily market movements?  Why are we allowing ourselves to fall for the trap of getting anxious over short-term swings in stock prices?

History tells us that rational, long-term investors see steady growth over time instead of panicking at the first site of short-term swings in stock prices.  This is not to say that the markets won’t go lower in the coming days, weeks or months.  In fact, we are still awaiting a correction of, what some economists believe will be at least 10%, which the markets deliver with some regularity on their way to new highs.  The thing to remember is that the daily price of your stock holdings are determined by mood swings of skittish investors whose fears are stoked by pundits and commentators in the press.  What they don’t say in the media often enough is that the value of your stock holdings are determined by the effectiveness of millions of workers who go to work every day in offices and factories, farms, warehouses, etc.  Each day these workers are incrementally building up the value of their businesses with their labor.

The economy is still growing.  You won’t get a daily report on the value of the stocks you own; only the daily, changing opinions of skittish investors.  But if you take a second look at the growth of an investment in stocks over the long-term, you get a better idea of how that value is built over time, no matter what the markets will do tomorrow.

Article written by Bob Veres of Inside Information

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