Perspective on market volatility on the anniversary of the Global Financial Crisis

For most of us, the Global Financial Crisis (GFC) was the worst investing environment of our lifetime and one that none of us wants to revisit. Coincidentally, for that cycle, the market bottomed on March 9, 2009, exactly 11 years ago today.

Today was (in some ways) a historic day with the largest point decline on record for the Dow Jones and the S&P 500, and the markets’ circuit breakers being triggered. At this point, we are all well aware of the issues the markets are facing – with the impact of the coronavirus chief among them and an almost constant stream of headlines detailing quarantines, closings and cancellations of places and events. Many of the equity markets are now officially in bear market territory (a decline of 20% or more) and the question for many investors is, “What do I do now?”

The speed of the decline has been surprising, but most investors have dealt with bear markets of this magnitude before. The aforementioned GFC is one example, but more recently the S&P 500 fell 20% in 2011 and again during the second half of 2018. In each one of these instances, there was a prevailing theme of why, “This time will be different;” but in each instance, investors who had a plan and had the discipline to stick to that plan recovered. We firmly believe that making an emotional decision to change a portfolio in the midst of weakness and volatility is detrimental to an investor’s long-term portfolio, performance and financial plan.

So, is this time different? A very good question and one we won’t know the answer to until after the fact. The markets are moving very fast, but the investment cycles have become increasingly compressed because of the rise of systematic, computerized trading. However, the markets have dealt with viruses and pandemics before (SARS, MERS, H1N1, HIV) and history suggests that, from both a health and economic/market perspective, the results tend to be relatively short-lived and measured in months or quarters. The fear is that a decline in global economic activity related to the coronavirus will ultimately lead to recession. While this is a possibility, the markets appear to be well on their way to discounting it and the current weakness comes against the backdrop of full employment, low inflation, low interest rates, accommodative monetary policy and declining energy prices – all supportive of consumers.

We would remind investors that the basis of a sound plan to deal with these periodic but certain bouts of weakness and volatility includes the following:

  • Diversification – We advise clients that a well-constructed portfolio is diversified by the types of investments in it. We recommend allocating to a variety of assets, including all different sectors of the equity market, real assets (real estate and Master Limited Partnerships), cash and different types of bonds. While equity markets have been under pressure in recent trading, high quality core fixed income has continued to generate cash flow and has, in most cases, appreciated in market value to help offset some of this weakness.
  • Rebalancing – For each and every client, we have in place a specific Asset Allocation Policy that dictates how we have agreed to spread your portfolio across the various asset classes included in it. We complement that allocation policy with a strict rebalancing discipline where we have agreed to rebalance the portfolio when the allocation to any of these asset classes varies substantially from their targets. This rebalancing strategy systematically incents good investor behavior by having the effect of selling asset classes when they have appreciated and buying asset classes when they have declined. Since this volatility began in late February, we have been diligently reaching out to clients and rebalancing their portfolios where appropriate and necessary.
  • Be resistant to panic and euphoria – Many investors want to “do something, anything” in the event of market weakness. A well-constructed and diversified portfolio along with a strict rebalancing policy will result in portfolio activity when and if it is necessary. This helps avoid the potential pitfalls of an emotional reaction.
  • An honest assessment and acknowledgement of risk – Investing involves taking risks in order to achieve one’s goals. For most investors, the biggest risk in their investment portfolio comes from equity holdings. History has shown us that equities provide the highest returns over long holding periods. However, in order to realize those higher returns, one must accept the volatility and inevitable periods of weakness. We spend a significant amount of time on this topic with each client and review it consistently for affirmation or change when necessary. We find our clients to be well prepared for these types of market environments.

As the markets continue to endure historic volatility, we understand that clients will be anxious. We want to assure you that we are diligently reviewing your portfolio for adherence to its asset allocation policy and suggesting changes when and where deviances are outside of agreed upon thresholds. Additionally, our research professionals are working diligently with managers to understand what they are thinking and planning over the next days and week. Our fixed income team is evaluating and monitoring current holdings and market conditions and suggesting changes where necessary.

In summary, while no one knows exactly where and when this will end, we have been through bear markets before, have a consistent investment plan and philosophy, and your Moneta team stands ready to answer any questions you might have and to take appropriate actions where necessary.

Disclosure: © 2020 Moneta Group Investment Advisors, LLC. All rights reserved. These materials were prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. Past performance is not indicative of future returns. These materials do not take into consideration your personal circumstances, financial or otherwise.

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