Here’s a crazy fact: At the end of 2011, the S&P 500 index(1) ended at exactly the same 2010 index number of: 1,257!! What makes this more incredible is the fact that 2011 saw some of the greatest stock market movement (called volatility) in history, yet it finished virtually unchanged.
These facts alone should be a learning lesson about reacting to your emotions during volatile times such as we experienced this past year. Wouldn’t you have been better off if you only looked at your retirement account(s) once a year? Doing exactly that would have saved you much anxiety through those temporary, but volatile periods.
While remaining “in” the market (as opposed to selling out and going to cash) contributes to the majority of investment returns, there are ways that attempt to smooth out the overall volatility from month-to-month. The importance of limiting volatility can be summed up in the following example:
- Suppose you invested $100 dollars on January 1st into a moderate investment that ended up dropping 10% that year. At the end of the year, you would have $90 left (your loss is $100 x .10 = $10). And if that same investment of $90 increased by 10% the following year, ($90 x .10 =$9), you would now have $99. To get back to $100 in that same year, the investment would have had to return 11.1% ($90 x .111 = $10). This means you needed another 1.1% to get back where you started.
OK, fine. So that’s how percentages work—you say. But follow the next example where there is much greater volatility:
- Suppose you invested $100 dollars on January 1st into an aggressive growth account that ended up dropping 25% for the year. At the end of the year, your investment would be worth $75 (your loss is $100 x .25 = $25). And just like the previous example, if the same investment increased by 25% the following year (the amount of your increase $75 x .25 = $18.75), you would now have $93.75…which still leaves you 6.25% down from when you started. That means, in order to get back to the original amount of $100, your investment would have had to return 33.3% ($75 x .333 = $25). Here, you needed another 8.3% of return to get back where you started!
The lesson learned here is, “the less you drop, the less you have to climb.”
Our firm has a wide variety of investments that can possibly help you lower your volatility. This may provide steadier returns, and make opening your next statement a less shocking experience! Call my office for more details.
(1) The S&P 500 is an unmanaged stock index. S&P 500 is a registered trademark of Standard & Poor’s Corporation. Investors cannot invest in the S&P 500 index.