Investors were whipsawed by equity market movements in August. After staying relatively flat through mid month the S&P 500 fell 11% in six trading days and then jumped up 6.4% over the next two. It was a wild, white knuckle ride that no doubt left a lot of investors fearful and nervous about their equity allocations and what was to come next.
It is 100% natural to feel anxious given what has occurred. Such rapid, large swings in value are unsettlingly. Among our most critical roles as your investment advisor is to remove emotion from the equation. Emotions can drive rash decisions. This is why we go through a thorough process to design an Investment Policy Statement (IPS). We factor in your willingness and ability to endure large swings in value, as we have recently seen, to come to an asset allocation target that is designed to meet your goals. By letting the IPS guide the decision making in such situations keeps your portfolio in line with its long term goals and risk tolerance level.
Markets have been particularly volatile recently and we think this trend will continue for some time. The past several years were unique in their reduced volatility and relatively steady march upwards. Since 2012 the standard deviation (a measure of how volatile an investment is) of the S&P 500 was 9.3%. However, from 1950 to 2012 stocks had a standard deviation of 14.6%. Stocks have been about 36% below their normal level volatility recently. While on the more extreme side over the past few weeks, we expect equity markets to return to the historical volatility levels moving forward.
This volatility creates opportunity. It provides the ability to buy into low valued assets and sell high valued ones. Given recent market movements, international equity, and emerging market equity in particular, is down. We will look to take advantage of this decline in value to buy in and sell areas which are comparatively up, fixed income or US equity. For taxable investors we also seek to harvest losses, while keeping the portfolio fully invested in the market with our recommended tilts. Taxes can be a significant drag on performance and this maneuver can provide a meaningful reduction in portfolio costs.
Some are saying now is when market timers will have success. However, we believe trying to time the market is a fool’s errand. Not only do you need to know when to get out of the market, you need to know when to get back in. Getting both calls correct even once is hard let alone frequently. We do not think this
is something that can be reliably done and numerous studies support this.
The markets have taken investors’ portfolios on quite a ride recently and we expect the heavy volatility to continue for some time. RWM will continue to keep unflinching discipline in times of heavy market turmoil; monitoring your portfolio for opportunities to buy into down asset classes and keeping your portfolio positioned appropriately given your time horizon.
Index Performance Aug. YTD Trl 1Yr
US Stock (Russell 3000) -6.04% -2.61% 0.36%
Foreign Stock (FTSE AW ex US) -7.54% -3.36% -11.27%
Total US Bond Mkt. (BarCap Aggregate) -0.14% 0.45% 1.56%
Short US Gov. Bonds (BarCap Gov 1-5 Yr) -0.01% 1.08% 1.37%
Municipal Bonds (BarCap 1-10yr Muni) 0.17% 1.00% 1.51%
Cash (ML 3Month T-Bill) 0.01% 0.02% 0.03%
Raffa Wealth Management is an independent investment advisor providing nonprofit organizations, high net-worth investors, and qualified retirement plans with a full range of investment consulting services. We were established to fill the need for transparency, clarity, and vision in the professional management of investment assets. Visit us at www.raffawealth.com