Motley Fool guest contributor Brad Hessel manages an investment advising service in North Carolina. He has previously worked in investment banking, and has founded or co-founded a computer game design company, a CASE tool software company, and a knowledge management consulting practice.
The Motley Fool community is weighted toward investors, as opposed to traders. As such, it has been hard for many of us to stomach the constant drumbeat of the financial media's daily mantra that "buy-and-hold is dead."
Whether they surface on CNBC, investing websites, or blogs, these diatribes generally focus on the trailing 10-year period, an admittedly tough one for stock returns. But they make it sound as if each of the past 10 years, rather than just the last 20 months, has been straight downhill for long-term investors. And they ignore the brutal past six months we long-term investors have endured, which have simultaneously provided more speculative traders with the closest thing to paradise-on-earth they've likely ever seen.
As if we were not in the midst of a stupendous singularity
In fact, our current level of volatility is unprecedented in most of our lifetimes. According to Yahoo! Finance, which lists high-low-close data for the S&P 500 index going back to March 1950, the average daily change in the value of the index over the previous 60 years has been a tad less than 0.6%. In 2006, it was 0.5%. In 2007, it was 0.7%.
In 2008, the average daily change in the value of the S&P index was 1.7%.
This is a huge variation: 300% of normal volatility, on average, day in and day out, for a year! Given the staggering trading volume of highly liquid (and relatively new) exchange-traded funds, this may not come as a surprise. After all, Proshares QQQ Trust (NASDAQ:QQQQ), SPDRs (NYSE:SPY), and the iShares Russell 2000 (NYSE:IWM) do more than 70 million shares per day in trading volume.
But wait, there's more. Let's dig into the data:
|
Single-Day Change |
"Normal" (1950-2006 Average) |
2007 |
2008 |
2009 |
|---|---|---|---|---|
|
±0% |
54.19% |
49.40% |
25.30% |
16.90% |
|
±1% |
37.84% |
37.45% |
35.97% |
29.58% |
|
±2% |
6.38% |
9.16% |
17.39% |
23.94% |
|
±3% |
1.09% |
3.98% |
7.11% |
14.08% |
|
±4% |
0.30% |
0.00% |
5.93% |
7.04% |
|
±5% |
0.11% |
0.00% |
3.16% |
5.63% |
|
±6% |
0.02% |
0.00% |
1.98% |
1.41% |
|
±7%-to-9% |
0.05% |
0.00% |
2.37% |
1.41% |
|
±10% |
0.01% |
0.00% |
0.79% |
0.00% |
Source: Yahoo! Finance as of April 15, 2009.
That's an admittedly dense table. But look at the second column -- the way things "normally" played out, from 1950 to 2006 -- and you'll notice that 54% of the time, the S&P 500 closed up or down less than half of 1% in a day (rounding to 0%). An additional 38% of the time, the index closed up or down 1%, leaving a small percentage of greater-than-2% movements up or down.
In this environment, the index cranked out a compounded annual growth rate in the neighborhood of 10%.
We are far from that happy place now
So, to recap: It's normal for the S&P 500 to essentially close unchanged (less than half a percent up or down) about half the time. The year 2007 was close to normal. 2008, though, was off the charts, with the volatility reaching a fever pitch in a surreal fourth quarter.
There have been just three days since March 1950 in which the S&P 500 moved up or down 10% or more -- and two of them took place in the fourth quarter of 2008! The only other crazy-volatile day was Black Monday, Oct. 19, 1987. On that fateful day, the market dove 20%, dragging such big names as Boeing (NYSE:BA), 3M (NYSE:MMM), and DuPont (NYSE:DD) along for double-digit losses.
In 59 years, there were a total of 14 days in which the index moved up or down 7% to 9%. Six of those days were in 2008 -- five of them in the fourth quarter alone. In a "normal" quarter, the index moved less than half a percent up or down on an average of 32 or 33 trading days. In the fourth quarter of 2008, there were only four such days.
Color to the numbers
We have just experienced titanic levels of volatility that (hopefully) we will be able to tell our grandchildren about -- provided we live so long, and provided there isn't worse still to come. While it was on average more volatile than all of 2008, the recently completed first quarter of '09 was considerably less wild than the last quarter of '08. So far, so good.
But even if we encounter more turbulence before the systemic risk storm abates, this momentous event seems much more unusual and isolated when viewed from the perspective of decades. So whenever you hear one of those nattering nabobs carrying on about the death of buy-and-hold, keep in mind that he or she is drawing conclusions and trends from a singularity. These naysayers essentially argue, "Forget 58 years of experience, and attend only to the last year."
In my opinion, that's a decidedly foolish -- with a small "f" -- thing to do.
