One of my jobs as a financial manager for individuals and families is to put things into perspective, especially during times of short-term market distress, which can be quite stressful for the average person. In recent years I have tried to regularly remind my clients that normal stock market corrections of 10% or more occur about every year or so over the long term. Since we had not seen one since 2011, it had been four years since investors felt a near-term shock to their portfolios, which made being prepared for the next one especially helpful.
Given how much day-to-day stock market activity is computerized these days, one thing that is different now is that market moves happen more faster than they used to. What previously had taken weeks and months to take shape now can come and go in a matter of days. As I write this, the S&P 500 index is trading at 1,912, which is 10.4% below the all-time high made back in May. Amazingly, 8.8% of that decline has come in the last 4 trading days.
So what is important to keep in mind as computers send the market into a new world of volatility? Keep things in perspective. This can often most easily be accomplished with graphics, so below I present three charts of the S&P 500 index:
Here is a year-to-date chart for 2015 which shows the current, sharp 10% decline:
Granted, that might look and feel kind of scary on its own.
Now, to see how far we have come and how much we have declined on relative terms, here is a 5-year chart:
I would guess that this second chart is far less scary to most people. It shows the market having more than doubled over a five-year period, includes the last major correction in the market (August 2011), and the most recent period appears to be no more than a standard, run-of-the-mill correction in stocks.
The last chart might be the most interesting, as it goes back 10 years. I included this one because it includes the last market peak before the “Great Recession” decline of 2008:
Even after the last week of declines, the U.S. stock market is still considerably above the peak it reached in 2007, just before the second largest economic collapse in United States history.
None of these charts can predict how the market will fare over the coming days, weeks, or months. Hopefully it does put the last decade in perspective and show that what we are experiencing right now, while not fun, is neither out of the ordinary, nor overly disconcerting. If you are retired, the plan you have in place with your financial manager is likely unchanged, as it should have incorporated the likelihood (or certainty, more precisely) of normal, periodic market declines. If you are still in the “work and save” phase of your career, times like these are a great time to add to your investment portfolio, as great companies are on sale.