J.P. Morgan: On Market Volatility

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Samantha Azzarello and Ainsley E. Wooridge at JP Morgan remind us to think long term when responding to market volatility:

Historical analysis shows that pullbacks of 5% have occurred about once a quarter, and pullbacks of 10% are likely to occur once per year. Large pullbacks greater than 20% tend to occur just once per market cycle. A savvy investor will recognize the high frequency of equity market volatility, and will determine the source of the volatility before reacting to it.

Focusing on the long-term trends of the market rather than the short-term gyrations should give investors the confidence to ride the waves of volatility. When examining historic equity market data, we see a trend of rebounds following equity market pullbacks. That means that investors who jump ship after a big wave may have broken the cardinal rule of investing by “selling low.”

Despite an average intra-year drop of 14.2%, the market ended the year higher than it began it 76% of the time. That is why it is important for investors to ride the wave of volatility through its full cycle.