Fisher Investments Explains What to Weigh Against Volatility

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When negative stock market volatility strikes, one common mistake Fisher Investments finds too many investors make is reacting to very short-term moves. A rocky day, week or even month can often fool stock market investors whose goal is investing to fund long retirements into abandoning or avoiding stocks—despite the fact stocks’ long-term returns may be necessary to fund those very retirements. To many, this calls for carefully considering your comfort level with day-to-day swings when determining the mix of stocks, bonds, cash and other securities you own—an important point. But Fisher Investments also thinks you must weigh your investment time horizon—and what stocks have done over longer periods.

There is little question stocks are more volatile than bonds or cash in the short run. Since quality stock market data begin in 1928, Fisher Investments researchers found 5,653 days in which stocks rose or fell by more than 1%. [i] That is just over 23% of all trading days. We have a lot less data on bonds. But the data we do have illustrate this point: Since daily data begin in 1986, the ICE BofA US Treasury Index rose or fell more than 1% in just 50 of 9,000 trading days—0.56% of the time. [ii] ICE BofA’s US Corporate Bond Index was more volatile. But still, up or down moves exceeding 1% occurred in just 0.70% of trading days. [iii]

Even over somewhat longer time frames—like a year—stock returns are much more volatile and variable than bonds. On a rolling 12-month basis, stocks’ biggest historical percentage gain is 161%, from June 1932 to June 1933. [iv] The biggest decline? -68%, a year earlier. A fancier way of saying this is that stocks have a higher standard deviation than bonds over short periods like one or five years. That means stocks’ returns over these stretches vary more from their averages than bonds’ returns do. [v] On a rolling 5-year basis, stocks’ average return is 10.1% with a standard deviation of 8.4%. [vi] Bonds average 5.2% with a standard deviation of 4.0%. These data show stock returns are higher, but with considerably more variability than bond returns.

Yet the reality is that most retirement investors’ time horizons aren’t one day, a month, or even a year. If that were true, investing in stocks or bonds would be very unwise. Even five years likely doesn’t match many investors’ actual investment time horizons, which Fisher Investments considers as the length of time you need your money to work in order to reach your goals. If you are investing for retirement, that likely means your investment time horizon is at least your lifetime—perhaps longer, if you have a younger spouse or plan to leave a bequest to family or a charity. Given long life expectancies in America, workers on the cusp of retirement age could have 20, 25 or 30 years to plan for. If the latter is true for you, one day amounts to 0.009% of your time horizon. A month? Just 0.28%.

Historically, over these longer spans of time, an interesting thing happens: Stock returns vary less from their long-term average than bonds. On a rolling 30-year basis, the S&P 500 averages an 11.1% total return—with a standard deviation of just 1.3%. [vii] Bonds average 5.6% returns with a 2.7% standard deviation. So in a very important sense, Fisher Investments’ research reveals that stocks are less volatile than bonds in long time frames that seem more relevant to investors than just a day, month or year.

A rocky period in markets can be unsettling, and your comfort level with those potential swings is important to weigh. But if you need stock-like returns for some or all of your portfolio to fund your financial and retirement goals, then it is also important to consider whether you are likely to achieve the returns you need without stocks. There is no placid path to high returns. In Fisher Investments’ view, occasional negative volatility is, unfortunately, the price tag for getting the returns stock market investors may need.

Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.

[i] Source: FactSet, as of 05/05/2021. S&P 500 Price Index, 01/03/1928–04/30/2021.
[ii]
Source: FactSet, as of 05/05/2021. 10/31/1986–04/30/2021.

[iii] Ibid.
[iv]
Source: Global Financial Data, as of 02/26/2021. 12/31/1925–12/31/2020. Calculated monthly using total returns.
[v]
Source: Global Financial Data, as of 05/05/2021. S&P 500 average 5-year rolling total return and GFD 10-year Treasury Index total return, 12/31/1925–04/30/2021.

[vi] Ibid.
[vii] Ibid.

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