• Treavor Dodsworth

#128 - A Little Volatility Can Go A Long Way


A Little Volatility Can Go A Long Way

The world at large is experiencing some pain that is partially flowing through to the stock markets. That is what I want to address but first, stop and pray for the situation in Ukraine- for the people directly affected and for the leaders making decisions. I don’t want my discussion to take away from the people that are experiencing these events firsthand. At the time of my writing this, VTI (Vanguard Total Stock Market ETF) is down about 9% year-to-date. Market volatility doesn’t feel good. In fact, it can be quite unsettling. I feel it myself at times. That said, for some investors, volatility isn’t necessarily a bad thing even if it doesn't feel good. We can't always trust our feelings. For example, let’s say at the end of the year we know the market return will be 8% (we obviously don't know). There are limitless scenarios of how we could get to that return but let’s look at a few of them. Scenario 1: The market earns a little bit every single month and your account slowly climbs. This feels really good. Scenario 2: The market advances quickly early and then pulls back towards the end. This feels really good initially but then less so. Scenario 3: The market drops initially and then slowly climbs. This doesn’t feel good initially but then does later. Many investors are investing additional funds every month (in a similar amount) as they earn an income. For those investors, which of these scenarios likely feels the best? Scenario 1. Which of these scenarios likely ends up giving the best result? Scenario 3. Market volatility isn’t always good (Scenario 2 is likely the worst in this example) but it also isn’t always bad. We don’t know what the market will do from here. It may go up or go down but I believe in sticking to the principles, namely:

  • Invest according to an allocation that is consistent with your time horizon, risk tolerance, and goals

  • Maintain a long term perspective

  • Don't allow feelings to be the only driver of investment decisions

 

Interesting Article(s) or Video(s)

IRA Help - Watch Out For the Five-Year Rule on Converted Roth Funds

  • There are several different rules regarding distributions from Roth IRAs in regards to if you will have to pay tax or penalty. In this article, Sarah explains the five year rule for converted funds and also briefly mentions the “forever five-year rule” which is a separate five year rule to be aware of for Roth IRAs.

A Wealth of Common Sense - Investor Psychology During a Sell-Off

  • Interesting take on the current sell off. Per the article, the S&P has had 37 corrections of 10% or worse since 1950. Most of those times the S&P did not turn into a crash per the article. Obviously we don’t know what will happen from here but it is important to take note of that- we don’t know what will happen (especially in the short term).

 

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