What You Need to Understand about Stock Market Volatility
BOTTOM LINE: There are two different types of declines that occur in the stock market. Understanding the two can save you a lot of money from losses.
Pop Culture Finance has a new word for declines in the stock market whether it is temporary or longer-term. It is all wrapped up into one category that they refer to as volatility. Let me ask you a question. Would you feel better that you lost -50% of your retirement if it was only volatility?
I think it is a total misrepresentation of how investments work. Here are a few facts that history affords us.
During bear markets, the stock market loses on average -36% of value. The last two bear markets saw losses of -54% and -50%. They do happen and they do occur. This is not volatility. This is a bear market. Volatility implies something more short-term. Bear Market implies something more longer-term. This is why you won't see Pop Culture Finance even use the words Bear Market anymore. They want you to believe that bear markets don't exist and have been replaced by "volatility." According to the Hartford the average bear market decline is 10 months. The last one lasted approximately 17 months until a recovery occurred.
They will contrast how long a bull market lasts versus a bear market showing that a bull market lasts much longer on average than a bear market. A hurricane doesn't last as long as a period of rain. However, in that short amount of time, a hurricane does a tremendous amount of damage.
Volatility is not a good replacement word for a bear market. However, it is a good word for a stock market correction. This is the other type of decline that investors experience. Corrections are short periods of time where the market will decline 10 to 20% THEN they rebound and start going up again. Investors should be able to stomach the more frequent stock market corrections. A correction occurred at the end of 2018 where it dropped 20% and quickly rebounded. It was fierce while it lasted. However, the stock market quickly recovered.
So, what is the take away?
Bear markets do exist and we are in a high probability environment of one occurring. Bear markets are good times to reduce risk and take cover. Corrections or volatility are times where investors should ride it out. The key is that Pop Culture Finance wants you to believe that bear markets don't exist and every decline is nothing more than a correction. Calling every decline stock market volatility creates a better optic for the market.
Bear markets have not gone away. Be aware of the difference between corrections or volatility and bear markets. This understanding could help you escape devastating retirement losses.