Goin’ up, goin’ down… let it roll

“Goin’ up, goin’ down, goin’ up-down-down-up… any way you want, let it roll” (song lyrics). Volatility has been low in the past few years. As measured by the VIX volatility index, market fluctuations are at the lowest level since before the global financial crisis. That doesn’t mean high volatility is immediately around the corner, but it is important to remember that smooth markets are not the norm. All investors should expect some down-down as part of the long-term up-up.

A recent analysis by J.P Morgan showed that since 1980, the S&P 500 Index had positive returns in 24 out of 31 years. In every one of those positive years, at some point during the year, the S&P was negative (as much as -34%)! If we are to be successful long term investors, we have to be willing to “let it roll” during inevitable short-term fluctuations. Diversification and rebalancing help to manage risk, but accepting short-term volatility is the price we pay for long-term real returns.

Let us be clear: “let it roll” is not rolling the dice, or gambling. It means sticking with an appropriate strategy through market variability. It means avoiding the experience of the average equity investor who under-performed the S&P 500 by 7.4% per year for the last 30 years by not having and sticking to a strategy (Dalbar Study). Let it roll!