Look Less, Sleep Better

With the recent wave of choppy markets (up one day, down the next, up again the day after) there have been some articles that suggest the less you look at the market, the less risky they seem. Based on recent experience, this appears to be true.

In late March, somebody who was looking at the daily price of the S&P 500 movements would have seen the markets go down 0.04%, then up 1.13%, then down 1.23%, then up 1.43%, then up 0.5%.  If that same person had simply been looking at returns at the end of each week, the volatility would have been washed out; he or she would have seen again and nothing to worry about.

Looking once a month or once a year smooths out the returns even more. You can best see how this works when you consider the value of your house. It’s not reappraised every day, week, month, or year, and chances are you aren’t worrying about whether it’s more valuable today than it was yesterday or last week.

The same is also true of the calculations used to define the riskiness (or volatility) of a particular investment. The most commonly used measure is the standard deviation – the higher it is, the more the investment price will swing back and forth.

Most often, this calculation is made by taking the average of 5 years of returns and the average of the variances over those 5 years. But, if you were to use 1-year numbers instead of 5 years, the standard deviation would be higher; if you were to use 10 years, on the other hand, the risk calculation would go down.

The charts shown here offer a similar perspective; you can see how choppy (and scary) market movements look over a couple of months, or a couple of years, or over more than 10 years.

Monthly

Three Years

10 Years

If Rip Van Investor were to go to look at the markets, then go to sleep for a decade, wake up and check his portfolio once again, chances are, over any time period, the view would range from reassuring to something to uncork a bottle of champagne over.  He would have saved himself a lot of aggravation that a lot of us put ourselves through needlessly.

References:

https://www.macrotrends.net/2526/sp-500-historical-annual-returns

This content is developed from sources believed to be providing accurate information. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

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