Surely you recall how stock market volatility spiked earlier this year, especially during the mid-February to the end of March time period. In that five week span we plunged head first into a BEAR MARKET, the first one in over 10 years. During the preceding BULL MARKET, the VIX Index, a measurement of stock market volatility, averaged 16.85% but as we suddenly shifted into Bear territory, the VIX dramatically increased and peaked on March 16th to 82.69%. This was nearly 5 times more than what had been considered normal!
Yet volatility works both ways so investors that held onto their portfolios were quickly rewarded in Q2 and Q3 as many of Q1's losses were erased by a rapidly increasing stock market.
Most recently, fear and increased volatility have been on the menu again due to the contentious Presidential Election (which we have covered in two recent Blog posts) as well as lingering COVID-19 fears. That begs the question, "what should our clients do?"
For perspective, let's consider two previous very real and very fearful times, those being the outbreaks of the SARS Virus of 2002 and also the Zika Virus of 2016. Let's also consider two hypothetical investors. Please reference the below chart, which also may be viewed here as a pdf: Short-term volatility: What’s your move?
Notice each of two investors in each of these previous viral outbreaks had $1,000,000 invested. Each was allocated 100% to stocks. As volatility intensified and fear quickly drove stock prices lower, at the height of pessimism one investor declared "enough" and shifted 100% to bonds (represented by the lighter purple line in each graph), while the other investor stayed the course. Over the next 3 quarters the investor who stayed won big, while the investor who changed lost big.
While it is unlikely that you are either 100% in stocks or 100% in bonds, it's quite likely that you are experiencing increased uneasiness due to election and COVID-19 uncertainties. At Henry Wealth Management our prescription, especially during periods times like this remains the same; "Build a long-term portfolio that you can live with and then live with it!"
Do we ever recommend allocation changes? Of course, yet always based on a thoughtful action as we consider your goals and plans and time frames and never based of an emotional reaction to events and volatility and fears.
Please consider these helpful examples and as always, feel free to contact us with questions or comments.