Ride Out the Volatility

In the research section of our website, there is a note written by Lowell Pratt on May 9^th, 2011 titled Time to Cash Out of the Market?  In the note, Lowell establishes expectations for the market that every investor must realize:

The most reliable aspect of the market is the fact panics WILL occur…to try to avoid them leads to the market timers bane, which is being out of the market when it’s about to perform best and in the market when it’s the most comfortable, and therefore most vulnerable.

Earlier this year, we saw 62 consecutive trading days in which the S&P 500 moved by less than 1%. This is the market at its most comfortable. Contrast that to the past 6 days in which the S&P 500 has moved 1% or more 5 times.

The only sure way to capture the market’s appreciation over time is to stick it out through thick and thin, and that means exposing ourselves to EVERY market panic that occurs.

This is the advice investors must follow to be successful in the market. In the 20 year period from 1990 to 2010, the individual investor averaged 3.5% annual returns vs. the S&P 500’s 7.8% annual return. The difference is referred to as the Behavior Gap and it exists when investors (1) don’t understand the inevitability of corrections and (2) aren’t able to ride out the downturns.

In the end corrections are meaningless, typically soon forgotten moments of excitement and they serve a constructive purpose chasing faint-hearted investors out of the market. This periodic “pruning” is an important aspect of a healthy bull market.

Keep the faith!