Volatility is most often a bad sign for investors, since it’s frequently associated with declining equity markets.
Wild swings in a portfolio’s value create anxiety and concern for the future. That concern grows exponentially when market swings are driven by a highly contagious, and selectively lethal, viral pandemic. That’s the scenario we see unfolding around the world and in the United States—and we have no historical precedent to use as a guide for how these events will play out.
Obviously our first concern is for our families, friends, neighbors, clients, and colleagues. But now is a good time to reflect on steps to take to make sure our portfolio stays healthy. Some of these steps may be painful, since our instinct is to avoid what we perceive to be a dangerous situation. However, history has demonstrated that the most painful investment decisions tend to be the most rewarding.
How volatile have the markets really become?
Most investors understand that when they buy a diversified equity portfolio, they’ll inevitably experience volatility. However, what we have experienced recently is exceptional. To be fair, many financial experts have been predicting the end of the bull market for years. We’ve just concluded a decade in which the S&P 500® produced a compound annual return of 13.5%. For reference, since the 1920s, the S&P 500® has produced an average annual total return of 10.3%. In other words, we had a very good run throughout the 2010s that’s quickly come to an end.
Days to reach bear market status in the S&P 500®
Source: Bloomberg, 3/19/2020
Using the definition of a 20% decline in equities from peak to trough, we’ve just experienced the quickest bear market in modern history: 16 days. Sudden shifts in the market of this magnitude are indeed rare. The swiftness of the move has caused both realized and implied (or expected) volatility, as represented by the Cboe Volatility Index (VIX), to skyrocket to levels unseen since the 2008 global financial crisis.
Rising volatility during the COVID-19 crisis
Source: Cboe, 3/19/2020
In this market environment, it’s easy to understand why investors may be apprehensive. But there are a few important things we all need to keep in mind to avoid making decisions we may regret in the future.
The bottom line
It’s easy to say that a calm and long-term approach to market volatility is the best one—but it’s not always easy to take that approach. What investors can do right now is boost asset-class diversification and rebalance existing holdings by buying low and selling high. Discipline will be the watchword throughout the COVID-19 crisis, whether that means avoiding public places or avoiding portfolio panic.