What is "Normal" Market Volatility?

The market is selling off and, understandably, people are starting to worry.

This is a completely normal feeling. No one likes it when the markets go down. However, looking at the data should bring you some comfort.

History has shown market declines are an inevitable and natural part of investing. In fact:

·???????? A -5% or more decline happens about twice per year on average,

·???????? A -10% or more decline happens almost every 18 months, and

·???????? A -15% or more decline happens about once every 3 years,

According to this first chart from Capital Group :

As the second chart below illustrates, up until now we had only seen one decline of -5% or more in the S&P 500 for 2024, which happened back in the Spring. Overall, the 2024 stock market has been strong and has seen very low volatility leading up to this most recent selloff.

As of market close on Friday, 8/2/2024, the S&P 500 was down -5.65% from its July 16th high, marking the second decline of -5% or more this year.

Yesterday, 8/5/2024, was another tough day in the markets?with the S&P 500 down -3%. If this selloff continues and the S&P 500 falls below 5,100, that would be a -10% decline or what is traditionally labeled as a “correction,” but that too would be relatively “normal” for the S&P 500.

Remember from the first chart above that a -10% or more decline happens roughly every 18 months. Well, the last time we experienced that was July 2023, roughly 12 months ago. If we reach the -10% threshold soon, it would be earlier than average for a correction. However, it wouldn't be that abnormal since historical data indicates we were/are likely due for some level of pullback.

Right now, 2024 is starting to look more like an average year from a market volatility standpoint.

While the markets are undefeated over time, they rarely go up in a straight line. If you are a long-term investor, volatility is the price you pay when investing, and the goal is to never be a forced seller during those extremely volatile times.

Why? If you’re selling during tough market environments, it means you might be locking in losses that could otherwise only be temporary if/when the market recovers. Making emotional decisions and selling your investments when the market is down can be detrimental to your financial longevity.

That’s why I always pay special attention to cash-planning and encourage clients to keep 12-18 months of cash on hand. In my opinion, cash is your best hedge against market volatility.

At Monument Wealth Management , we view cash as an asset class and plan for clients to use it as a buffer against the inevitable downturns in the market like what we are currently experiencing.

I know it can be uncomfortable, but during periods of volatility, try to focus on your overall allocation, and the impact it has on your long-term goals and plans rather than short-term market swings. And if you need a bit of extra support, let the data help be your guide.