The current downturn is jarring not just because of the size of the losses but also because until recently we enjoyed an unusually lengthy period of relative calm in the markets. The CBOE Volatility Index (the VIX), which measures the implied volatility of S&P 500 Index options, trended near historic lows from 2005 through early 2007. And most other developed markets were similarly placid.
But volatility is back with a vengeance, and it’s understa
ndable if investors are a bit rattled. It’s not easy watching your hard earned savings shrink before your eyes. Add to that the constant drumbeat of bad news from the media, and you’ve got a recipe for panic.
That said, successful investors don’t let fear get the best of them. They have the patience and the fortitude to stick to their long-term financial plans, regardless of short-term volatility. Of course, that’s easier said than done. As Warren Buffett likes to say, “Investing is simple, but it’s not easy.” Buffett, by the way, is buying selectively in this market, snapping up Constellation Energy and injecting capital into Goldman Sachs and General Electric.
While your patience may be challenged amid today’s tough conditions, it’s easier to stay in the game if you bring some perspective to the woes we’re experiencing today. Even though stock markets have backtracked significantly this year, they have still delivered solid returns over time. Over the past 30 years, the MSCI World Index has returned a little over 9% per year on average through the end of September 2008. But of course, the index hasn’t pushed steadily higher year after year. On the contrary, it’s experienced its fair share of ups and downs along the way. Looking at rolling one-year returns over that 20-year period, the index experienced losses about a quarter of the time. Moreover, the index has experienced one-year losses of at least 15% roughly 10% of the time. But the long-term investor who rode out all these ups and downs still pocketed solid returns.
That’s not to minimize the historic nature of the events we’ve witnessed in recent weeks or the near-term risks that loom ahead. But it should serve as a reminder that the stock market will eventually right itself, and patient investors will benefit when it does.
