What Could The Swings In Equity Prices Be Signaling?Submitted by LWM | Linden Wealth Management LLC on May 19th, 2020
Higher Volatility Can Lead To Higher Future Returns
In an interesting set of tables, BlackRock shows how periods of high volatility often lead to higher future returns.
We know how fast and dramatic the recent downturn in equities was and the subsequent rebound that's underway. We also understand that prior performance is never a guarantee of future returns and that the path to recovery can be rocky.
BlackRock lists four tables representing the 15 best and worst trading days and months since 1950 and the subsequent one-year returns of the S&P 500. This year already occupies ten spots within the charts:
Amazingly, it doesn't matter whether we are looking at the best or worst days or months. With few exceptions, the S&P 500 one year later is positive and, on average, a substantial amount.
The results could be different, but if history is a judge, returns will be higher one year from now.
We can make several inferences from the data. First, the conditions that create high volatility skew the market toward higher future returns. Second, an investor who de-risks or sells following heightened volatility will likely underperform. And finally, your investment plan should determine how you allocate to risk (equities) and not the behavior of the market at any given point in time.
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