With all the market volatility over the past few months, it is hard to remember that, before mid-February, the stock market had been on a historic run. The conversations I was having with people for the six weeks before the market downturn were much different than those I’ve had in the most recent six weeks. I am reminded that, without a proper perspective, it is natural and normal to respond to these events emotionally. How we manage these emotions can be vital to experiencing a better or worse outcome.

The perspective by which we consider the stock market should be both historical and forward-looking.

Below is a chart showing some historical returns for the past 30 years. The purpose of this chart is to show the market return for each calendar year going back to 1979.  The thin green line moving towards the top of the image shows the largest % gain for the year. The thin red line moving towards the bottom of the image shows the largest % decrease. The thick highlight shows the year’s final % return. Using this chart, we can compare each year to gain some historical perspective on market volatility. Note the extreme volatility in 1987. Despite the huge up and down movement, the year ended basically neutral, with only a slight gain. Another note to consider is 34 of the 41 years reviewed had positive returns despite every year showing negative returns at some point during the year.

When considering a forward-looking perspective, none of us have a crystal ball to know when the market will move or in what direction, but there are some key questions to consider. What is the purpose of the money I have invested? And just as importantly, when will I need the money? By helping to identify answers to these questions, Financial Planning can help provide greater clarity on how to manage risks and investment choices.

Below is an image taken from MoneyGuidePro, which is the Financial Planning software program our office utilizes. This image shows the probability of success for a fictitious client. The success rate is generated based on a person's current goals, investments, and savings rates using random rates of return.

This software is key to providing a forward-looking perspective. When used with clients, this tool can bring greater clarity to the overall situation. If events going on in the market have caused the probability of success score to drop significantly, then it may be time to discuss what changes could be made. But if the current events create little to no change in the probability of success score, then there may not be a need for any changes.

What's the takeaway? When we understand where it is that we are going, and historically what has happened, it allows clarity and confidence in our decisions. When we don’t have a bigger perspective, many of us react to our emotions, leading to less than successful outcomes.