The average daily percent move of the stock market has increased over time. The reason for the increase in stock market volatility is mainly due to technology and the speed in which information moves and trades are executed.
Today, it's much more common to have “flash crashes,” where stocks hit an air pocket and take a dive. You should expect to see 5%+ corrections multiple times a year. Then, there are days where stocks melt up thanks to algorithmic trading and lightning fast information transfer.
In March 2020, the S&P 500 plunged by 32% from peak to trough in one month! Then, within several months, the S&P 500 gained back all its losses. In 2023, tech stocks have rebounded by over 50% in six short months.
Due to investor psychology, the S&P 500 generally goes up like an escalator and goes down like an elevator. This volatility in the stock market is one of the main reasons why I prefer investing in real estate over stocks.
If we're long-term investors, it's a good idea to understand how much the stock market moves a day on average. When stock market volatility spikes, we'll feel more calm and reduce our chances of doing something irrational.
Let's look at the average daily percent move of the stock market.
The Average Daily Percent Move In The Stock Market
Below is a fantastic chart that shows the average daily percentage movement of the S&P 500 over the last 10 years. Each dot represents one day.
As you can tell from the chart, the average daily percent move in the stock market is between -1% and +1%. The S&P 500 represents the stock market.
Therefore, if you are a long-term investor in the capital accumulation phase, you should consider buying more than your normal investing cadence when the S&P 500 is down greater than 1%.
If you're in capital preservation mode, you might consider selling some of your S&P 500 index position when the S&P 500 is up greater than 1%.
Of course, nobody knows the future. Trying to beat the S&P 500 over the long run through market timing is unlikely to work.
However, we're not trying to outperform the S&P 500. The majority of active fund managers underperform the S&P 500 or their respective indices over a five and 10-year period.
What we're trying to do is figure out how to best invest our cash flow, or larger-than-normal cash injections, during the capital accumulation phase and vice versa.
Here's another historical average daily percent move of the stock market for good measure. It shows the average percent move is +/- 0.73%.
Previous Bear Markets Performance
We've had 11 bear markets since 1929. A bear market is defined as a 20% or greater sell-off. Let's look at what happened during the four most recent bear markets to see what's possible.
1) August 1987 to December 1987
On October 19, 1987, the Dow fell 22.6 percent – the worst day since the Panic of 1914. By early December, the market had bottomed out and a new bull run had started. From August to December, the S&P 500 lost 33.5 percent. Thankfully, this bear market only lasted three months.
2) March 2000 to October 2002
The NASDAQ bubble burst on March 11, 2000. I remember sitting on the trading floor watching all my B2B and internet stocks start plummeting by 10%+ for no reason. Over the next nine months, the NASDAQ declined by 50 percent and I finally gave up hoping the dotcom mania would come back. The S&P 500 went from a high of 1,527 to a low of 777 for a 49 percent decline over 30 months.
3) October 2007 to March 2009
The housing collapse was the most brutal collapse for the majority of Americans alive today. Not only did the real estate market get crushed, the S&P 500 declined from a high of 1,565 on Oct 9, 2007 to a low of 682 on March 5, 2009, a 56.4 percent decline. The bear market lasted 17 months, which at the time, felt much longer.
Based on these past three bear markets, we shouldn't be surprised to see another decline of 30% – 55% over a 3 – 30 month period. Therefore, if you are in the capital accumulation phase and are bearish, you might want to start legging in only after a 2% or 3% decline instead of just a 1% decline.
4) March 2020 – August 2020
The latest bear market where we saw a 32% correction from top to bottom. Luckily, your boy here wrote a very precise stock market bottom prediction post to help the community not panic sell. Some of you actually profited by buying the dip.
By August 2020, the S&P 500 recouped all its losses and returned to its pre-March level. Currently, the S&P 500 is above 4,500. As a result, I'm not buying any more equities. Instead, I'm investing more in real estate.
As someone who is going back to retirement mode under the Biden administration, I want to ensure my capital is preserved. Further, it's always good to keep as much of your gains as possible.
5) 2022 Bear Market
The S&P 500 corrected by 19% in 2022. The NASDAQ declined by 33.47% in 2022. In other words, the bear market of 2022 wiped away all of 2021's gains, and then some, if you were a tech growth company.
If the Fed continues to aggressively raise rates as inflation and the economy slows, there will likely be another recession in 2023. We already had a recession in 2022 with GDP declining in both 1Q and 2Q.
Based on all the bear markets we've experienced over the past 20 years, it's good to have a bear market checklist to prepare for the next one. Having a proper asset allocation of stocks and bonds and your net worth are also vital.
6) 2023 Bull Market
What a difference one year makes. The average percentage move of stocks increased during the bank runs caused by SB and First Republic. Stock volatility then decreased after the Federal Reserve and Treasury Department stepped in.
Now stocks are back in a bull market, up over 20% since its October 2022 lows. The largest 10 tech stocks are up over 50% YTD.
Find Your Own Investing Methodology
Now that you know the average percentage move of the stock market, it's up to you to decide your investing methodology. You may want to invest in private funds to dampen visibility investment volatility in your public investments as well.
Personally, I like to invest in multiple tranches with each additional amount of capital earmarked towards an investment. It makes me feel better about risking my hard-earned money because I spread out my chances of buying at the top.
Feeling better might sound trivial, but if you don't feel good about your investment methodology, you will likely under-invest or never invest.
Over a 5, 10, 20+ year time horizon, your lack of investing might leave you far behind the investing class. Then you might get angry and blame the world for all your financial problems.
Example Of Investing In Multiple Tranches
Every year my wife earmarks $16,000 towards our son's 529 plan. $16,000 is currently the maximum gift exclusion amount for 2022 without having to file a gift tax return. I can no longer contribute to his 529 plan because I superfunded it in 2017 with five years worth of contributions.
Back when the gift tax exclusion amount was $15,000, we decided to split her $15,000 into three tranches of $5,000 – $6,000 each. We invested $5,000 at the beginning of January and another $5,000 at the end of January because we felt the ~17.5% sell-off in 4Q2018 provided a buying opportunity. In the end, we held off on contributing the remaining $5,000 because the market kept marching higher.
In March 2020, we invested $10,000 of the planned $15,000 for each of our children. We should have invested the remaining $5,000 each, however, we didn't think the stock market would rebound so quickly.
We have an 18-22 year investment time horizon for our son's 529 plan. As a result, for his plan, we are in the capital accumulation phase. We can afford to ride out a 2-3 year bear market.
As a DIY investor, investing family money can be stressful. However, you must stay on top of your family's investments and almost treat it as a second-job. One wrong move could wipe away years of progress.
Find Your Investing Comfort Zone
Back in 2012, I had just left my day job of 11 years. I received a six-figure lump sum severance that June and was thinking about hoarding it.
When you go from making a healthy income each year to suddenly nothing, it's hard to get the courage to invest your valuable cash into a risk asset.
Despite my fear, I felt the worst had passed. I also felt my severance check was like winning the lottery.
I almost didn't get it because I had inadvertently e-mailed an old confidential client file to my personal e-mail address when I was clearing out all my stuff. Luckily, my old firm recognized I did so in error.
To get over my fear of investing, I talked to my personal banker to see if there was some type of instrument that provided downside protection in exchange for giving up some upside. It turns out there was.
Invested In S&P 500 Structured Notes To Minimize Volatility
I ended up investing my entire six-figure severance check into a Dow Jones Industrial Average structured note that provided 100% upside participation and 100% principal protection in exchange for only receiving a 0.5% dividend yield instead of a ~2% dividend yield at the time.
Without the 100% principal protection, I wouldn't have had the courage to invest even 25% of the six-figure severance check naked long into the S&P 500. I likely would have just bought a CD earning 3.5% instead. Contrary to popular belief, not all structural notes are bad.
Below is a graphical example of a structured note that provides at least a 15% return over two years so long as the S&P 500 is not down more than 30%. If the S&P 500 is down more than 30%, you participate in the full downside. For the 30% downside protection, you have to give up collecting all dividends.
Today, my portfolio is defensive because I'm afraid of losing my gains. The average percentage change in the stock market seems much higher than +/-1% nowadays.
Everything earned after 2012 feels like funny money because I left work with enough. Now, I've got two people to take care of and maybe even more. The #1 rule after reaching financial independence is to never lose money.
Find an investment methodology that makes you comfortable enough to consistently invest over the long run. Make sure you also have a specific purpose for each of your investment portfolios.
Stock Market Volatility Is Part Of Investing
As long as we risk our money in stocks, we are always going to be subject to volatility. We must accept this fact. The average percentage change in the stock market may go higher or lower, depending on the economy.
Since 1950 the S&P 500 has seen an intra-year drawdown of 5% or worse more than ~90% of the years. ~40% of the years, the S&P 500 has fallen 5% to 10% intra-year. ~38% of the years, the S&P 500 has fallen 10% to 20% intra-year. ~16% of the years, the S&P 500 has fallen in excess of 20% intra-year.
It takes a tremendous amount of discipline to always pay attention to your cash flow and then have the confidence to invest it in the stock market. As a result, most people fail to regularly invest.
Based on my experience, the best investing methodology is to automatically invest a certain amount each month and then invest extra during large selloffs. For your retirement accounts like your 401(k), your company should provide an option to make contributions automatic.
For your after-tax investment accounts, the easiest way to invest is to go through a low-cost digital wealth manager like Betterment that automatically invests your money into a risk-appropriate portfolio. Link your checking account to automatically contribute a set amount so you don't have to think about it.
Predicting short-term performance is nearly impossible. However, over the long term, chances are high that things will turn out all right.
Invest In Real Estate To Reduce Volatility
If you hate volatility, as most investors do, I suggest investing more in real estate. Real estate is my favorite asset class to build wealth because it is tangible, produces income, and provides utility.
Once you've purchased your primary residence you are considered neutral real estate. Since you have to live somewhere, you will simply ride the real estate cycle. To be long real estate you must own investment property in addition to your primary resident.
Once I had my son in 2017, I decided to sell my PITA rental house. I reinvested $550,000 of the proceeds into real estate crowdfunding. Today, I have over $1 million in real estate crowdfunding across a couple funds and 17 investments.
My favorite two real estate crowdfunding platforms are:
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends.
Both platforms are free to sign up and explore. I've personally invested $954,000 in real estate crowdfunding to earn income passively.
Invest In Private Growth Companies
In addition, consider investing in private growth companies through a fund. Companies are staying private for longer, as a result, more gains are accruing to private company investors. Finding the next Google or Apple before going public can be a life-changing investment.
One of the most interesting funds I'm allocating new capital toward is the Innovation Fund. The Innovation fund invests in:
- Artificial Intelligence & Machine Learning
- Modern Data Infrastructure
- Development Operations (DevOps)
- Financial Technology (FinTech)
- Real Estate & Property Technology (PropTech)
Roughly 35% of the Innovation Fund is invested in artificial intelligence, which I'm extremely bullish about. In 20 years, I don't want my kids wondering why I didn't invest in AI or work in AI!
The investment minimum is also only $10. Most venture capital funds have a $250,000+ minimum. In addition, you can see what the Innovation Fund is holding before deciding to invest and how much. Traditional venture capital funds require capital commitment first and then hope the general partners will find great investments.
The Average Daily Percent Move In The Stock Market is a Financial Samurai original post. I've been writing about personal finance since 2009. Further, I worked in equites at GS and CS for 13 years.