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The Simple Step to Keeping Calm Amid Volatility

By Brian Stoffel – Jun 18, 2020 at 7:30AM

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Improve your outlook by pinning up this sign in your room.

These feel like harrowing times. We are in the middle of the first pandemic of this severity in over a century. Protests continue in every state on a daily basis. And for investors, the stock market decided to become hyper-volatile once again last week, dropping over 5% on Thursday.

Perhaps Lenin put it best: "There are decades where nothing happens; and there are weeks where decades happen."

2020 may well end up feeling like one of those long "weeks." But for investors, there's an easy way to keep a cool head.

Chaos written in wooden cubes and a wooden mannequin on blue background.

Image source: Getty Images.

First, let's put this in perspective

If you started investing in 2019, you experienced exactly zero days in which the S&P 500 dropped over 3% in one session before the calendar turned. If you started as far back as Jan. 1, 2012, you endured just eight such days...total. Think about that: eight years and just eight days of gut-wrenching losses.

Then, 2020 hit. Thus far this year, the S&P 500 has dropped 3% or more on 14 different occasions. All but two of them happened during a six-week period ending in early April. To put that in perspective, this is what it looks like:

Chart showing big drops by year in the S&P 500 going back to 2012.

Chart by author. Data Source: Dow Jones Market Data, Investing.com.

There is, however, a silver lining. We've also had more days than usual in which the market went up by 3% or more. It has happened 11 different times so far this year. In fact, the best days in the market typically happen right alongside the worst days.

Chart showing large swings up and down in the S&P 500 by year.

Chart by author. Data source: Dow Jones Market Data, Investing.com.

But this alone isn't the end of the story. If we know that big swings up and down go hand in hand, it's better to focus on volatility. That's because -- no matter the direction -- such volatile moves can wreak havoc on our nervous systems.

Right now, it feels like we're experiencing a "War of Narratives." There's one side that believes we'll have a V-shaped recovery. In other words, our economy -- and thus, the stock market -- will quickly snap back to where it was.

"Due to the odd nature of a pandemic-based sell-off, coupled with federal spending to bridge the gap, we'll get over this soon." That's the elevator pitch for the story. The market has largely done that already, but it will take longer for us to know if the same is true of the economy. 

Then there's a darker narrative: the U-shaped recovery. "It will take months and years for businesses to come back online, and the pandemic has exposed fault lines in American society that won't heal quickly." That's the other elevator pitch. And we need to remember that if COVID-19 spikes across the country again, it would only add fuel to this narrative. That's likely what happened last week.

So which narrative is the right one?

Here's the answer you may not like: Over the short term, no one knows!

The antidote to your problems

It's OK that no one knows. We here at The Motley Fool are long-term investors. And by long-term, we mean decades. If history has shown us anything, it's that investing for the long haul is the surest way to build your wealth.

Former Motley Fool writer Morgan Housel used to make the same point about long-term investing repeatedly. It went something like this:

Every day around the world, people wake up telling themselves they'll make their world a little bit better. Most days they will, a few days they won't. But over time, billions of people doing this compounds. The effects of everyone waking up with this mindset eventually filter bottom-up to the stock market.

If you're betting against the stock market in the long-term, you're basically betting against human nature. Don't take that bet.

When this pandemic started, The Motley Fool began offering live streaming shows to members. I've been lucky enough to be a part of that. During the first few days of the experiment -- in the middle of the worst volatility -- we constantly got questions about what the market was going to do that day.

To help reset our expectations and our time horizons, I rearranged a simple sign hanging in my office. It is very small and powerful. Here's what it looks like, just over my shoulder.

Picture of author wearing headphones with a sign behind him that says Sept. 13, 2046.

Image source: The Motley Fool.

What happens on Sept. 13, 2046? That's the date I turn 65. That's when I've told myself I'll start withdrawing from my retirement fund.

Is that the actual date I'll do it? Probably not. I have no idea.

But I like putting a specific date down. It focuses my mind. It reminds me that a million things will happen between now and then. Some of them will be bad, but most will be small and very good. Over time, those small and good things overwhelm the bad.

Since I put that sign up, I've rarely lost sleep over the direction of stocks. It took me 30 seconds to make it with a crayon and sheet of paper from my 7-year-old daughter. You should make one with your date for your own room.

Volatility is the price of admission for generous stock market returns. This sign is a reminder that over the long run, the human spirit is strong. Taking 30 seconds to hang your own sign might end up being the greatest investment (for the effort) you ever make.

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