Don’t Fear the Reaper, or, the Volatility of the Stock Market

Both are certainties of life.

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If you enjoy ‘70s rock music, then you may be familiar with Blue Oyster Cult and their 1976 hit song “Don’t Fear The Reaper”. It was written by guitarist Donald Roeser and includes the lyrics:

“All our times have come

Here, but now they’re gone

Seasons don’t fear the reaper

Nor do the wind, the sun or the rain”

In my opinion, the song is about the inevitability of death and the foolishness of fearing it. So in comparison, if the stock market has and always will be volatile, why should you fear it?

For one thing, the media, in general, does a great job of making every headline about the economy into an Alert!, BREAKING NEWS!, or some other feature to get your attention. The important thing to note is that the stock market has recovered from every major disaster, war, or sovereign debt issue in the past, even though the media told us that “this time is different”.

In fact, according to the Investment Strategy Group*, since 1900, the Dow Jones Industrial Index has experienced declines of 5% (or more) 3 times every year on average. What’s amazing is that, in spite of nearly 30 declines of more than 5% for the 10 years ending December 31, 2011, a diversified portfolio of 60% stocks and 40% bonds averaged 6.7% per year!**. And don’t forget that 2008, when the Dow declined a whopping 33%, is a part of those figures.

So stay the course, turn off the TV, and learn to live with what you cannot change.

* Investment Management Division of Goldman Sachs
** Dimensional Fund Advisors – Matrix Book 2012

 

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