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. The important thing is to try to remove the emotion from the equation. Emotions can drive rash decisions. This is why we recommend maintaining a target investment allocation that is designed to meet your retirement goals and rebalancing to its targets. By having a specific plan in place it can help remove the desire to make significant changes to your portfolio based on what is currently happening, or what may happen over the next six months. Those moves would likely take you off track given your portfolio’s long time horizon. Staying true to your target asset allocation keeps your portfolio in line with your retirement goals.
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 rebalance your portfolio by buying into low valued assets and selling high valued ones. Given recent market movements, international equity, and emerging market equity in particular, is down. This is an opportunity to bring your international equity holdings back to their targets and sell areas which are comparatively up, such as fixed income or US equity.
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. If you hold your emotions at bay and stay focused on your long term plan you can avoid the traps that can sink a portfolio and keep it positioned for the best opportunity for success.
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