Don’t let ‘flash movements’ knock you off your investment strategy. Photo by Phil Walter/Getty Images.
Last Friday seemed like a rather ho-hum day for the market—until 11 AM Chinese time, when the Shanghai Composite Index jumped +6% in a couple of minutes! Then fell, ending the day down -0.6%. Naturally, questions soon followed (along with the typical fears over big “flash” moves). This week, Chinese media revealed a local brokerage, Everbright Securities, made a “fat finger” error, mistakenly putting in buy orders totaling 23.4 billion yuan ($3.8 billion). Now, what happened isn’t clear—did someone fall asleep on the “buy” button? Trip and land on it? Unwittingly add a few extra zeroes? Potential comedic causes aside, this saga highlights an important lesson: Glitches or no, intraday volatility happens—but over the long term it looks like a blip, so long-term growth oriented investors likely needn’t fret the odd flash move.
History shows flash moves don’t much impact long-term performance. Take 2010’s Flash Crash. On May 6, 2010, the S&P 500 hit an intraday low of -8.6% in a matter of minutes—yowzer!—before rebounding to close the day down only -3.2%. Still a big one-day move, despite the intraday recovery. But it didn’t much disrupt full-year returns—markets were choppy for a couple weeks after the crash but strong in the year’s final months. The S&P 500 Total Return Index finished up 15.1%, and the Flash Crash was but a distant memory.
April’s Twitter crash was similarly non-impactful. US stocks dropped 1% in three minutes after hackers sent a false tweet regarding a terrorist strike from the Associated Press’s feed—then recovered in another three minutes. Markets finished the day about flat, and the bull market marched on—April and May were fine months for stocks, and the S&P 500 Total Return Index is up 16.8% year to date.
For long-term, growth oriented investors, getting caught up in the day-to-day movements of markets is folly more often than not. Extreme volatility can be uncomfortable as it happens—and it’s natural for this discomfort to tempt investors to bail on stocks. But past price movement—over any length of time—says nothing about what markets will do looking forward. Investors who act on volatility alone could risk missing the long-term growth they need to reach their goals.
Markets will always be volatile—it’s inherent in equity investing. But accepting volatility is vital to achieving long-term growth, and accepting the possibility of the rare flash crash or boom is part of this. There will be more! So take a deep breath, grit your teeth, steel your nerves, and keep a longer perspective.