Is the Volatility in 2018 Normal?

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posted on Fri, Oct 26, 2018

This is an update from a post earlier this year.

I apologize ahead of time for all the numbers in this post!  I promise it is for a worthy cause and it will make sense at the end!

It is October 26, 2018 and there have been 208 days the stock market has been open in 2018.  The past few weeks feel like whirlwind.  I have been fielding a lot of questions and one of the more popular ones is, “Is this normal?”  That is usually followed up with, “What do I do?”.  I’ll do my best to help answer both questions.

Is this normal?

The short answer is yes.  But you don’t have to take my word for it.  I’ve done some research!  There are a lot of ways to talk about volatility, but at the end of the day most people are concerned with how often their portfolio goes down.  And more importantly, how often does it significantly goes down.  I went back and tracked every day of the S&P 500 from 2000 – 2016.  That is 4,267 days the market was open.  Out of those 4,267 days, the S&P 500 dropped 1% or more 619 times (14.51% of the time) and it dropped 2% or more 195 times (4.57% of the time).  To simplify, in an average month the S&P 500 dropped 1% or more 3 times and 2% or more once.  It is normal for the stock market to go down significantly.

So far in 2018, the S&P 500 has dropped 1% or more 21 times (10.01% of the time) and it has dropped 2% or more 10 times (4.80% of the time).  The 1% or more drops are actually well below the average from 2000 – 2016. And the 2% or more drops are almost right on the average.

The long answer to the volatility questions is yes, 2018 is a normal year in the market (in fact it is less volatile than the average year).  It probably seems more volatile because 2017 was not normal at all and it is fresh on everyone’s mind.

In 2017, the S&P 500 dropped 1% or more only 4 times (1.59% of the time) and it never dropped below 2%.  It is by far the year with the least amount of 1% drops since 2000.  The next closest is 2006, when the market dropped 1% or more 5.18% of the time.  2017 was far from a normal year and we may not see another one like it for a very long time.

What do I do?

The short answer is nothing if you are investing for a goal or over a period of time.  A sound investment strategy knows all the statistics I listed above and takes that into account going in.  If you don’t have an investment strategy that is built for a certain time or goal, this would be an appropriate time to evaluate why you are investing and maybe sit down with an investment advisor. 

Please feel free to contact me anytime to discuss this topic or any other in more detail.