There is a funny GEICO commercial that says Moms call at the worst times as the guy is fighting his way through a Mission Impossible like scenario. The commercial ends with It’s What They Do. I was recently reminded of this commercial the other day when I heard volatility in the markets is near all time lows. The markets are supposed to go up and down it’s what they do.
It is fair to say that volatility in the stock market is in rare territory these days, particularly at the lower end of historical norms. The VIX has never logged a close below 9 but is currently down near the lowest levels in history.
Below is the chart of the VIX – a measure of expected volatility for the S&P 500 Index. Please note that volatility is at levels seen during the mid ‘90s and 2000’s.
If you needed any more evidence to this point, as of this writing (July 27th, 2017), the S&P 500 has experienced just 4 times this year where it closed >1% higher or lower than the previous day’s closing price. For context, by this time last year, there had been 39 times where it closed + / – 1% from the previous day (Yahoo Finance).
Starting from the beginning of 2009, the following table shows there have been an average of 14 intra-year declines of -3% or greater.
It’s interesting to note that even in 2013 – where the S&P 500 gained +29.6% (dividends excluded) – there were 7 declines during the year of at least -3%.
Again, the data would suggest the market is very complacent so far in 2017.
Generally speaking, equity markets go back and forth through periods of high volatility followed by periods of lower volatility.
During periods of high volatility, declines may seem dramatic and swift, increasing the “fear” among investors, while periods of low volatility put investors at emotional risk, since smaller change in day to day price movements can make investors desensitized to the inevitable forthcoming stock market declines that history shows will eventually come.
It’s important to explain that an increase in volatility does not necessarily mean decline in price for the S&P 500. For instance, in Dec 2006, the VIX Index was at a low of 9.39 (with S&P at 1427), and 7 months later in July 2007, the VIX had gone up to 15.59 (with S&P at 1555). Note however, the market was much choppier on its way up from 1427 to 1555!
Unfortunately long periods of high or low volatility may lead to irrational behaviors by many investors. They tend to operate by the principles of fear and greed. Low volatility has been part of the reason the markets have been grinding higher for the past 7 or 8 months. I believe this has lead to a lot of people chasing returns. It is a Fear of Missing Out mindset. Just like in 2008/09 when volatility was very high and people were getting out of the markets because they could not handle the heavy losses and were fearful that they were going to continue.
Periods of extremely low or extremely high volatility historically do not last very long. So what can you do? It is important to prepare your portfolio and mindset for what may come next when a more normalized level of volatility returns.
You can do Nothing!
You are comfortable with how your portfolio is positioned and you are ready to let it ride. A buy and hold strategy has worked for the last several years and it may work going forward or it may not. Truly only time will tell.
You can Sell and go to cash!
The markets seem to be hitting new all time highs every day in the past few weeks, maybe it is time to take some profits? How much should you take? When do you get back into the markets once you have sold? What is the proper market valuation and how do you know when you have gotten there? These are all questions you would have to be able to answer if this is the option you choose.
You can buy portfolio insurance
You can hedge your portfolio using options. How much are you willing to spend to protect your portfolio? Insurance isn’t free and neither is building an options portfolio. Besides being expensive it can be very difficult to build a good options plan to protect your portfolio.
You can re-evaluate your investment approach
Sometimes it is good to get a second opinion. If you had major repair bill on your car you would probably shop around to find the right mechanic at the right price. Just because what you have done has “worked” for the past several years or in this market cycle does not mean it will continue to work moving forward. Does your current advisor have an investment discipline that they can explain to you? Have you asked about it?
At Thorium Wealth Management, we believe there are times to proactively prepare your portfolio for “hurricane season” and times where you can let the sails out and enjoy the waters. Our disciplined approach following both trend and technical analysis helps us to serve our clients’ investment needs in such a way that we seek to capture most (no advisor can get “all”) of a market upturn, but be able to help safeguard against significant downside losses. There are no fool proof investment strategies but we believe that taking a more tactical approach to asset allocation in the context of a holistic financial plan allows for better client outcomes.
So what are you going to choose?
If you want a second opinion on your current investment portfolio you can schedule a call with us. We look forward to learning more about your goals and how our process may be able to help you. Until then remember that doing nothing is a choice by default but is usually not a very good one.
This is for informational purposes only and it not intended for advice for any individual. Quoted performance data represents past performance. Past performance does not guarantee future results. Investments return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more of less than their original cost. Asset allocation does not protect against loss of principal due to market fluctuations. It is a method used to help manage investment risk. All investments involve varying levels and types of risks. These risks can be associated with the specific investment, or with the marketplace as a whole. Loss of principal is possible.
S&P 500 Index is an unmanaged group of securities considered to be representative of the stock market in general. You cannot directly invest in the index.
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