Volatility is back, there’s no getting around it, and we’ve got ourselves a nice little 10% correction from earlier this year. Last week we saw big intra-day swings in the markets across the globe and yesterday we saw more of the same with the S&P 500 off nearly 3% at the end of the day and international markets off further. (Of course, the US market was actually up last week, but who’s counting?) The past few weeks have struck many as a bit of a shock, in large part because it has been some time since we’ve had really any volatility in the markets at all. The VIX (S&P 500 volatility) has spiked back to levels we haven’t seen since late 2011:
But we still pale in comparison to the huge swings in 2008 and 2009:
The primary issue is that we got comfortable. Really comfortable. I talked about this earlier – when we were fat and happy and too cozy in our calm markets to be bothered to remember what markets do on a regular basis. I see the irony in my post:
“I don’t know what the catalyst will be. More aggressive Fed tapering? Global unrest? An unseen recession? Political turmoil? War? Most likely it will be something none of us saw coming – that is how these things usually work out.”
Last year, not too many people said that we’d be getting a correction because of fears of a Chinese economic slowdown or because the anticipated-for-five-years-now Fed rate hike was finally (maybe) coming around the corner. I certainly didn’t.
The only thing you should be thinking with these kind of short-term corrections is “This Is What Stocks Do.” Put it on a post-it on the bathroom mirror or on the back of your phone or the side of your monitor or wherever you need the reminder. Stocks go down! Sometimes they do it quickly (see November 2008 – March 2009) and sometimes it takes quite a while (see 2000 – 2002). Sometimes they go down a little (do you even remember the decline in 2011?) and sometimes they go down a lot. Sometimes it’s because of a recession and sometimes it’s not. Every time someone you’ve never heard of will get credit for “predicting it” and every time someone who has been bearish for the last 20 years will revel in their brief vindication.
Each and every time you will have an opportunity to decide how you will respond. Are you going to stare at the market every day? Are you going to anchor on what your account value was three months ago and bemoan your “losses?” Are you going to find some market commentator who told you he saw this coming and now know exactly what you should do next?
Here’s what you should probably do when stocks go down: nothing. Boring advice, I know. But usually you should do nothing. Sometimes there’s an opportunity to take some tax losses. Sometimes it will warrant rebalancing (though rarely upon a 10% correction, depending on your rebalancing rules). Most of the time you’re going to do nothing. We’re not good at doing nothing (more on that later) but give it a try. Go outside or read a good book and tell yourself “This Is What Stocks Do,” and do nothing.