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Equity Perspectives

In volatile markets, there are three points to remember: stay calm, stay in, and stay the course.

The one certainty of investing is that your portfolio will experience volatility. Further, volatility can trigger emotional responses that may cause investors to make irrational decisions that could lead to missed opportunities. Prudent investors stay the course, with the understanding that investment success is not just a matter of how well you do in up markets but also how well you weather the downside.

Three points to remember are: Stay calm, stay in, and stay the course.

Stay Calm

The truth is that market ups and downs are normal.

In fact, in any given calendar year, the average drawdown (peak to trough decline) of the S&P 500® Index historically has been nearly 14%.

Yet, despite the intra-year volatility, the index has tended to finish most years higher than it started.

Since 1980, for example:

  • The S&P 500 has delivered an average calendar-year return of more than 10%, including positive returns in many of the same years that large drawdowns occurred.
  • The index also has delivered positive returns 84% of the time, and has returned more than 20% nearly 40% of the time.

Though such favorable outcomes can never be guaranteed, it is clear that being calm and patient during periods of volatility historically has rewarded investors.

 

Drawdowns Are Common, But Don’t Always Translate into Full-Year Declines
S&P 500 annual price returns versus maximum price decline, as of December 31, 2017

Source: Morningstar.
Note: The historical data are for illustrative purposes only, do not represent the performance of any specific portfolio managed by Lord Abbett or any particular investment, and are not intended to predict or depict future results. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment. 
Past performance is not a reliable indicator or guarantee of future results.

 

Stay In

An investor who exited the market and subsequently missed just 10 of the best-performing days in the past 20 years would have lost out on more than half of the gains. Given the difficulty of market-timing, a far better course would have been to stay in, with the knowledge that volatility is normal and that missed upside can dramatically cut into long-term returns.

 

Missing the Best-Performing Days1 of the Market Can Have a Significant Impact On Your Portfolio
S&P 500 annualized returns, January 1, 1997–December 31, 2017

Source: Morningstar. Standard & Poor’s.

1The “best” days to be invested are defined as the days on which the S&P 500 Index delivered its highest returns for the given periods based on historical data. 2Returns are measured based on the S&P 500 Index. 3This illustration depicts the value of a hypothetical $10,000 investment in the S&P 500 Index from January 1, 1997, through December 31, 2017. Note: The historical data are illustrative purposes only, do not represent the performance of any specific portfolio managed by Lord Abbett or any particular investment, and are not intended to predict or depict future results. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment. Past performance is not a reliable indicator or guarantee of future results.

 

Stay the Course

For long-term equity investors, the most powerful factor is time: historically speaking, an investor’s time horizon is directly correlated with the likelihood that a portfolio will experience positive returns. For these long-term investors, staying the course is the most critical consideration when trying to build wealth and meet their investment objectives.

 

The Longer You Stay In the Market, the Greater the Potential for a Positive Outcome
S&P 500 Index returns in calendar-year periods, 1927–2017

Source: Morningstar.
Note: The historical data are for illustrative purposes only, do not represent the performance of any specific portfolio managed by Lord Abbett or any particular investment, and are not intended to predict or depict future results. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment. Past performance is not a reliable indicator or guarantee of future results.

 

A Note about Risk: The value of investments in fixed-income securities will change as interest rates fluctuate and in response to market movements. Generally, when interest rates rise, the prices of debt securities fall, and when interest rates fall, prices generally rise. The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy.

Statements concerning financial market trends are based on current market conditions, which will fluctuate. All investments involve risks, including the loss of principal invested.

This material is provided for general and educational purposes only. The examples provided are for illustrative purposes only, and are not indicative of any particular investor situation.

The S&P 500® Index is widely regarded as the standard for measuring large cap U.S. stock market performance and includes a representative sample of leading companies in leading industries.

The Volatility Index, or VIX, is a real-time market index created by the Chicago Board Options Exchange that represents the market's expectation of 30-day forward-looking volatility. Derived from the price inputs of the S&P 500 index options, it provides a measure of market risk and investors' sentiments.

Indexes are unmanaged and are not available for direct investment.

The information provided herein is not directed at any investor or category of investors and is provided solely as general information about our products and services and to otherwise provide general investment education.  No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as Lord, Abbett & Co LLC (and its affiliates, “Lord Abbett”) is not undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity with respect to the materials presented herein.   If you are an individual retirement investor, contact your financial advisor or other non-Lord Abbett fiduciary about whether any given investment idea, strategy, product, or service described herein may be appropriate for your circumstances.

Download our Volatility Brochure:
Riding Out Market Ups And Downs

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