In investing, there are theories and statistics — then, there’s reality.
Over the past three weeks, the US stock market has given investors a dose of reality in the form of market volatility.
This sudden shift can be attributed to a confluence of unexpected news, beginning in early August.
The first surprise came in the form of an unsavoury economic report: the US employment rate had leapt to a three-year high in July.
Reactions were mixed, ranging from the fear of recession to the prospect of an interest rate cut.
Adding to the uncertainty, Warren Buffett made headlines when his company filings revealed that he sold half of his Apple (NASDAQ: AAPL) holdings, the largest stock position in his company’s portfolio.
Then came the big one: Japan’s Nikkei cratered by over 12% in a single day.
The outlook looked bleak as investors around the world started dumping shares over fears of a prolonged market downturn.
Amid the worries, the US stock market was not spared.
The tech-heavy NASDAQ (INDEXNASDAQ: .IXIC) index fell into correction territory, declining by over 13% from its 52-week high.
With the benefit of hindsight, we know what happened next.
The market made an about turn and staged a huge rally.
As of last Friday, the NASDAQ index was 4.3% away from its 52-week high.
Statistics and reality
Market corrections are not an anomaly.
Back in February 2024, I shared the passage below (bolded for emphasis):
“Market declines have happened before and will happen again in the future.
Here’s the thing: you wouldn’t know when they would occur.
Nobody does.
We do know the odds for these declines, though.
According to wealth manager Ben Carlson, the S&P 500 undergoes a market correction (a 10% decline or more) once every two years, based on historical data.
The same frequency applies to the tech-heavy NASDAQ.
Bear markets, or when markets fall by 20% or more, do not happen as often.
For the S&P 500, such crashes happen once every seven years. The NASDAQ, however, experiences bear markets once every four years.
So, now you know the odds.”
Indeed, nobody rang the bell and told investors beforehand that the Nikkei was going to experience a double-digit decline in a single day.
That is the reality.
In addition, don’t count on being able to avoid the crash and somehow be able to buy back your shares when the market bottoms.
The swift change in the market’s direction over the past three weeks is a testament to how difficult it is to time your entry and exit to perfection.
Here’s the thing: it’s not an anomaly either.
In fact, I have shared statistics in my Business Times article last month:
“Let’s look at the S&P 500’s performance between May 2004 and May 2024, a 20-year period which produced an average annual return of 10.2 per cent per year.
Here’s the shocker: If you missed the market’s 10 best days, your double-digit gains will shrink to only 6 per cent per year.
And if you miss the top 20 days?
Your returns will plummet to mere 3.3 per cent per annum, barely keeping up with inflation.
Don’t bet on timing your entry either.
During this period, seven of the 10 best days occurred within 15 days of the 10 worst days. In other words, unless you can day-trade with precision multiple times in a row, you are better off just holding your stocks through the volatility.
Ask yourself, have you ever met someone who has consistently pulled that off?
I know I haven’t.”
Indeed, the recent volatility does fit the statistics above like a glove.
Get Smart: Reality bites
I have shared key statistics above.
But there’s nothing like experiencing a market downturn on your own.
To quip, you could read a thousand books about how to ride a bicycle, but there is nothing that comes close to getting on the bike’s seat and pedalling on your own.
That’s why we are advocates of time-tested investing strategies which can help you get better at investing.
That’s why we talk about practical things you can do to keep a level head when the markets are losing theirs.
At the Smart Investor, what we share today is based on our past experiences — accumulated over decades of investing our own money.
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Disclosure: Chin Hui Leong owns shares of Apple and Berkshire Hathaway.
