Does stock market volatility bother me? It actually doesn’t. I don’t lose any sleep or worry about my retirement funds at all.
Disclaimer: This is not a post about asset allocation. It’s focused on the part of my portfolio that’s in the stock market.
One reason is that I’m still a ways out from retirement. If you don’t need to withdraw any of the money you’ve got in the stock market for 15 years or more, why would you care what’s happening to stock prices today? You need to worry about where things will be in 15, 20, or 30 years when you’re selling off your stocks to cover your living expenses.
It might disappoint you if you’re addicted to adrenaline rushes, but you’re not going to learn much about the price of your stocks that far into the future by looking at what’s happening in the market today. The S&P 500 could fall 30% in the next month. That’s not going to tell you anything about the market two decades from now. And, sadly, it could go up at a 30% rate for the next five years, yet all disappear by the time you’re selling your stocks in 15 years.
One way to think about it is that I view stock market volatily as just a number. That number has no useful interpretation. My horizon is too far into the future for me to learn anything useful from current stock market movements, no matter how large they might be. Even if I change my plans and retire early, I’ll be consuming out of my non-equity portfolio, not my stocks. My stocks are purely for consumption in the distant future, at which point they’ll have been converted into something else.
I lived through the dot-com bust and the financial crisis. I didn’t lose any sleep then, and for that matter, I wasn’t even checking my account balances very often when those things were going on. I knew the numbers weren’t good (and when I did check my balances, I got confirmation of that) but I didn’t really care. The value of my portfolio simply wasn’t relevant to my day-to-day life because my time to retirement was too far into the future.
Even later, once I had gotten to the point of having a reasonable account balance, during the correction in 2022, I wasn’t aware for several months that there was a correction taking place. A few more months passed and I found out things had continued to move in the wrong direction.
There’s another reason I’m not worried about volatility. However much the market falls, I still own a part of many large, profitable US and international companies. It’s nice if the price goes up, but my stock purchases are not a speculative activity. I’m buying stocks because there are other people doing the work to generate profits and I get some of those profits without having to do any of the work.
Imagine that the US turns out to be a replay of Japan. If you’re not familiar, look at a chart of the Nikkei 225 going back to the 1980s. It peaked in 1989. I don’t mean it peaked in 1989, went through a correction, and then eventually recovered and hit new highs. I mean that as of this writing, the highest value of all time was in 1989. At the end of 2012, 23 years after the peak, it was still down more than 75%. An important lesson is that it did take off again in 2013. It’s more than tripled since. Eventually the stock market in a growing economy will turn around. Stock market appreciation is a long-horizon thing.
Even if for some reason - one which I can’t imagine no matter how hard I try - we would see that here, driving the PE ratio into the single digits, those companies would still have their earnings and send me dividends. Although US dividend yields have been low in recent decades, stock price increases have more than compensated. After the financial crisis, dividend yields shot up to 3.2%. Dividend yields in the 1970s were 3-4%, and in the early 1980s, they were 4-6%. It’s very likely that we’d see a substantial increase in dividend yields if the US market turned into the Nikkei.
Regardless of how the market values my shares, I’ll still own part of many large, profitable US and international companies. Those companies will make profits. I will get a share of those profits.