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Thin(k) About Your 401(k) Plan

Market Volatility Is A Reality

It is Thursday, June 24, 2021, and one of my favorite financial periodicals arrived in the mail today.  It is dated June 21, 2021, with a cover article exclaiming that last week was the worst week of the year for the DOW with the Index down 3.45% at 33,290.08.  The market seems a bit skittish to me with the pundits speculating on inflation and what the Fed might do to interest rates and when.  Volatility is real and it impacts the value of investors’ portfolios.  So, I do not take these swings lightly; but I do try to take them with perspective.

First, the DOW, while a very popular index watched by many, tracks 30 large, publicly owned blue-chip companies trading on the New York Stock Exchange and the Nasdaq Composite.  The S&P 500 which tracks the 500 largest corporations by market capitalization listed on the New York Stock Exchange or Nasdaq Composite is naturally more diversified and was down only 1.9% over the same period.  Here is a time where diversification worked to protect on the downside when the S&P 500 is compared to the DOW.  So, before you get excited or nervous, look at your portfolio to see if it looks more like the DOW or the S&P 500.

Second, the markets have periods of time where they are up or down dramatically.  We call them “corrections” and they are measured as declines of more than 10%.  In fact, the chart below illustrates very well what transpires when markets correct, which is a much bigger event than a down week.  As you can see, corrections happen fairly regularly and every year noted has a down period of time as noted as the “intra year decline.”

Now, below is a chart of the S&P 500 over roughly the same time period.  The trend is upward even though down periods occurred each year.

Back to the present. As I mentioned earlier, the periodical is dated June 21, so now it’s Thursday, five business days after the sell-off began.  The DOW just closed at 34,196.82 and is UP 2.72% for this one-week period (June 17-24).  Much is happening in the markets as we emerge from the pandemic with economies re-igniting around the world, albeit at different paces.  I fully expect volatility to remain in the markets.  However, this is good.  We are returning to normal and that means good things for the world economy and the markets over the long-term.

Just a reminder, that volatility can be positive too.  Let’s celebrate a week where the DOW was up 2.72%.

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