Have you ever checked the 10-day forecast and saw it looked like gorgeous weather, so you planned a bunch of outdoor events excited to have beautiful temperatures and sunny skies? Then in actuality, it happened to rain 7 out of those 10 days including severe thunderstorms on one which derailed all your plans. Welcome to the concept of volatility. Sometimes even with the best laid plans, you can't predict what will actually happen with 100% certainty. The weather is one of those things that we like to try to think is set in stone when we see the 10-day forecast, but as we have all experienced before, especially if you live in Michigan, it can change on a dime, unexpectedly and for unforeseen reasons. With Michigan weather, most of us know to prepare for some unexpected changes in the forecast. That's why we set up a tent for the graduation party, bring a poncho to the football game, and make sure there is indoor seating at the reception. These are ways we can mitigate the potential damage or disappointment that comes with volatile weather.
Just like the weather, the market can also have periods of volatility, and it does, we just aren’t as used to them. As steady as its growth has been for the past decade, we are now experiencing extended volatility this year. As of May 20, 2022, the average annual return for the S&P 500 for the past 10 years is 11.65%. As of that same date, the S&P 500 is down almost 20% at 18.14% for the year. We haven’t seen that very much and human psychology is built to think in a perspective of a, “what have you done for me lately”, type of mentality. Sometimes investors forget that only a little over two years ago, when the whole world shut down in March of 2020, the market went down 34% in a one-month period. People remember this, but not as much as when it was happening because the sting to that memory was overshadowed by the all-time highs the S&P 500 recorded since then. But now the all-time highs are replaced with a current loss, and no one will be able to miss knowing about it due to the ongoing anxiety, fear and overall negativity that we are bombarded with on a daily basis from multiple sources. In the Psychology world, this can be described by a term called “Negativity Bias”. It’s the effect of negative comments, results, events and so forth having a more powerful reaction on us than positive ones (Verywellmind.com, “What Is the Negativity Bias?”, Kendra Cherry, updated April 29, 2020.). You may have been praised for work you have done or something of the like multiple times, but one snarky remark or hurtful criticism erases all the positive feedback, and a person may dwell on that a lot more than the uplifting comments. Same thing applies in the market. The S&P 500 can average 11.65% annually for 10 years, but are people usually focused on that, or the fact that it is down over 18% currently, over a little under five months? Same goes for the weather, people complain when it is too hot, then it is too cold, too much rain, not enough rain, etc.
We are all human and have concerns, whether it is about plans that may be affected by the weather, plans for retirement that may be affected by the market, a financial plan that is being stressed currently by various factors or a total lack of a plan. The important thing to be mindful of is to take inventory of what you have control of and how to mitigate the risks that may arise, so the good times can be enjoyed, and the tumultuous times can be a little less stressful. After all, as there are more sunny days than stormy ones, there are more positive times in the market than negative ones.
Written by Leon Bennett, Chief Operating Officer, Majestic Financial, Financial Consultant, RJFS
*Any opinions are those of Leon Bennett and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
*The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.