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Dear Clients and Friends:
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Many of us love the ups and downs of roller coasters, carousels and television dramas, but few of us enjoy the volatility that U.S. and world markets have experienced these last few months. The volatility of the markets is their only certainty. In July 2014, John Anke wrote a short article highlighting a period of low volatility that we were experiencing in global markets. We thought, given the re-emergence of market volatility this summer, that it would be appropriate to revisit and update the topic. Our previously shared commentary from 2014 is italicized in the article below.
We hope you'll find something useful in the information that follows. As always, please feel free to call us with any questions or comments at 412-261-3644.
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Don't Become Complacent in
Low-Volatility Markets
... John W. Anke, CIMA®
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Economic growth in the United States, and positive company earnings, continues to drive the stock market to record highs even though we are facing geopolitical risks in the Middle East and Ukraine, and weak growth in the European Union. These risks are being largely ignored. Low volatility levels, as measured by the CBOE Volatility Index, have remained below historical norms for most of 2013 and 2014. During this time, markets have avoided "normal" stock market corrections. According to research published by Capital Research and Management Group, a -5% correction will usually occur three times a year and a -10% correction will occur once a year. Larger corrections of -15% and -20% occur periodically every two, and three and half, years, respectively. Historical data indicates that volatility will reappear in the future.
The low volatility honeymoon period has come and gone. Since mid-June investment markets have reacted to concerns over China, slowing global growth, and fear of a U.S. interest rate hike. In August, the S&P 500 dropped over 6% for the first time since 2011. From peak to trough the S&P 500 declined 12%. The rise in volatility has created anxiety, and reminded us of the difficult 2008-09 market experience. Our minds automatically relive that market downturn every time we experience significant volatility and stock declines. It is easy to get caught up in the short-term gyrations.
So how can you prepare for the return of volatility? Investors can take some simple steps to prepare for the future. First, reassess risk tolerance. If you were 60 years old when the most recent bull market began, you are now 65. Is the level of risk in your portfolio appropriate today? Second, rebalance portfolio exposure. Periodic rebalancing is an important exercise to remove unintended allocation exposures that arise from market gains. Third, diversify the portfolio. A properly-diversified portfolio should result in a smoother ride and lower volatility due to various interactions of asset classes during different market cycles.
We wanted to share simple advice that can help you navigate through these volatility times.
- As we shared above, corrections occur in the stock market on a regular basis, so a long-term investor will experience many different market corrections. During elevated levels of market volatility, it's important to understand what investments you hold and why they are in your portfolio. Stocks are held for long-term growth and to offset the impact of inflation over time. In order to get the benefit of this asset class, you will inevitably encounter bad market environments. Fixed income investments are held as a stable component of your portfolio and to help meet your income needs. Your fixed income exposure is also an important source of liquidity when the stock market has decreased in value as it allows you to avoid selling equity investments at depressed values.
- It can be tempting for investors to say that they want to sit on the sidelines until the markets settle down. However, market timing is an extremely difficult investment strategy to execute successfully. The stock market is forward looking, and market prices begin to recover long before you see any real changes in the underlying causes of the downturn. We only need to look back to 2014 for an example of how quickly equity prices can rebound. From September 18, 2014 to October 16, 2014, the S&P 500 index lost -7.3% over 20 trading days. Then without any warning to those who had move to the sidelines, it rocketed back from the bottom to reach a new all-time high just 11 days later.
- An Investment Policy Statement is a good document to revisit during a market downturn. This document spells out the game plan for your portfolio and helps provide you with the right mindset for how you should think about your portfolio structure as it relates to your long-term goals. Having a well thought out plan and executing it greatly improves your long-term investment results.
Long-term success is dependent on developing and staying true to your investment strategy. Your long-term investment plan should be designed to navigate all market environments, including today's volatile market. It can be especially trying when volatile markets are tugging at your emotions. It is important to remember that your long-term portfolio strategy is there to help guide you.
We hope our guidance can provide clarity and assist during this elevated period of market volatility.
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Orion Client Portal Update:
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We are excited to announce that the Orion client portals have  been rolled out and are ready to go. Many of you have already logged in to see the information now available. If you haven't yet logged in, what are you waiting for? This website, along with the mobile apps, gives you access to current account information, along with the ability to create and view some valuable reports. Please contact your advisor if you want more information or have any questions about logging in. (Note: With Apple's release of iOS 9, the Orion app may not work properly. Please do not install the software update if you're planning to access your Orion portal on an iPhone or iPad.)
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Don, Nancy, John, Derek, Beth, Vicky, Theresa, Karen and Julie Ann
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