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Let’s Talk About Stock Market Volatility

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Let's talk about stock market volatility because we have seen some extraordinary volatility lately. Let’s start by recalling the basic axiom of investing in common stocks: If you want the so-called equity risk premium, then you should expect stock market volatility and, in fact, welcome it. It’s completely counterintuitive.

Without volatility, you wouldn't get the excess return over fixed-income on common stocks. Yes, we've entered a period of heightened volatility, as is shown in this chart. Volatility is much higher than before the pandemic. Spikes of 3% in the S&P 500 have occurred more often since Covid-19 struck, as shown in this chart.

We experienced a period of low volatility for much of 2021. However, in recent months, stock price volatility surged. What’s difficult is understanding why investors should be happy when stocks periodically shed value sharply. Otherwise, the long-term returns on stocks would not make financial sense. This is why a risky investment like stocks paid a premium over U.S. Government guaranteed fixed-income securities.

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Subtracting the annual return on government-backed U.S. Treasury-bills from the return on the Standard & Poor’s 500 index, the resulting 8.7% is the premium paid annually for taking the risk of owning U.S. stocks over the 20 years.

To be clear, investing in America’s 500 largest publicly held companies in the past 20 years ended September 31, 2022, earned an average of 8.7% more annually than a risk-free investment. Investors were paid a premium for many generations for owning U.S. stocks, which are risky.

Amid a bear market that is not expected to end while the Federal Reserve is still raising lending rates to slow the economy, which will put people out of work and tamp down inflation, try to be happy about it.

Do you have questions about stock market volatility or any other aspect of tax and financial planning?

Nothing contained herein is to be considered a solicitation, research material, an investment recommendation, or advice of any kind, and it is subject to change without notice. Any investments or strategies referenced herein do not take into account the investment objectives, financial situation or particular needs of any specific person. Product suitability must be independently determined for each individual investor. Tax advice always depends on your particular personal situation and preferences. You should consult the appropriate financial professional regarding your specific circumstances.
The material represents an assessment of financial, economic and tax law at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete, and is not intended to be used as a primary basis for investment decisions.
This article was written by a professional financial journalist for Advisor Products and is not intended as legal or investment advice.

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This article was written by a professional financial journalist for Responsive Financial Group, Inc and is not intended as legal or investment advice.

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