A Word on Volatility


Retirement savers are looking at their 9/30/15 statements and are likely seeing some disappointing numbers. This is a good time to provide perspective and show how the market’s volatility can work for us…and, recall the sage wisdom of market philosopher, Bill Belichick.

Maintaining Perspective…

Recent market swings, and the volume of trades from equity to fixed income, demonstrate how the “average, emotional” investor may become spooked at sudden, severe drops.  This can cause ill-timed decisions and lead to the fatal flaw of investing: “buying high, selling low”. Consider the return of the average investor over the past 20 years:


The average investor typically follows a strategy of, “I’ll get into the market when I’m comfortable and get out when I’m uncomfortable”. This is destined to lock-in overwhelming underperformance, since they usually feel comfortable when the market is rising, thus “buying high”, and start to feel uncomfortable when the market drops, thus “selling low”. How this might look in a simple picture:


Despite the poor YTD and 3rd quarter numbers, the S&P 500 is up 184% since the low in March, 2009:


And, for an even longer perspective, the chart below tracks the S&P back to 1900, noting milestone events. The 2015 YTD performance barely registers…


Despite efforts to prepare investors for the inevitably of market fluctuations and the need to stay disciplined, human fear and emotion is difficult to offset. In fact, Aon Hewitt reported trading activity in 401(k) accounts on Monday, August 24 was 7X the normal level. The market dropped 588 points that day. Not surprisingly, the trades where mostly out of equities and into fixed income. Year to date through 9/30/15, $100B has flowed out of domestic equity funds.

Let Volatility Work FOR You!

The benefit of participating in our retirement plans is that we’re making systematic contributions over the long term. Because of this, we’re able to take advantage during market downturns by purchasing more shares at less of a cost. Over the long term, this reduces our average purchase price. The industry term for this is “dollar-cost averaging”.  An example of how this works:

Assume you’re paid on a monthly basis and contribute $1,000 each paycheck to your 401k plan. If you knew ahead of time how each fund would perform, which would you choose, A or B?


By investing at systematic intervals over a 12 month period, a participant in Fund B would have ended the year with a higher account balance…even though Fund A’s share price steadily increased. Why? Because Fund B’s volatility worked in the participant’s favor.  During drops in Fund B’s price, the participant was able to purchase more shares.


Think of it this way, when Target has a “1/2 off sale” or your tire retailer has a “Buy 3, Get One Free” promotion, we have no problem spending our money because we know we’re getting more for less. If you’re a long-term investor in a retirement plan, have this thought in mind during market declines…you’re buying MORE shares for LESS.

Bill Belichick And Long-Term Investing

As mentioned above, human fear and emotion are powerful forces to counteract. This is especially true when we see negative numbers on our 401(k) statements and experience market corrections. The media isn’t a particularly calming influence either when it flashes images of a crestfallen trader or unendingly runs hyped-up intro teasers…


When these events occur again, and they WILL occur, think of this guy:


What does Coach Belichick have to do with long-term investing? He is unemotional and disciplined…which, long-term, retirement savers need to be. One of his oft-used quotes is this:


Now, Belichick mentions this to his players in the context of media comments, outrageous predictions by “experts”, quotes by opposing players and coaches, etc. But, we can easily apply this same quote, and its meaning, to how the stock market is reported on a minute-to-minute basis. “Ignore the noise”…stick to your plan and focus on the long-term.

Investment education delivered by an experienced, thoughtful advisor emphasizes this approach and can help calm the natural instincts and reactions of the average investor.


The Financial Professionals of Summit Financial Corp (7 New England Executive Park, Suite 900, Burlington, MA 01803) offer access to Securities and Advisory Services through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser.

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