Volatility, the New Normal?
Whether you’re watching the bond market or domestic US equities, 2018 has presented more volatility than we have seen in recent years. This can cause investors to question strategy and be tempted to “play” the volatility or move to the sidelines.
The yield on the 10-year US Treasury rose 45 basis points in 2018 to a short-term high in February before pulling back to the 2.80% mark. Moreover, in the last thirty days we have witnessed numerous three percent or greater shifts in this part of the yield curve both upward and down. As one would expect, the equity market has not been dissimilar, experiencing even larger percentage swings. After a correction of greater than 10% in early February, domestic equities spent the next five days recovering or essentially bouncing off this short-term low. Over the last month more than half of the trading days have seen a change in closing price on the S&P 500 Index in excess of 1%, either up or down. If we were to look at the change in intraday high/low, that percentage of trading days would be considerably higher.
Suffice it to say we have been experiencing some volatility. What does that mean and what should you do about it? For insurers, we recommend keeping the long-term perspective. If you’re already investing in equities, it could be prudent to take advantage of larger market corrections by “averaging into” your holdings. This will help lead to outperformance over time. If you’re considering investing in equity for the first time or the first time in a while, keep in mind the surplus volatility marked to market assets such as common stocks present. Again, long-term perspective is key. We recommend determining how much surplus volatility due to equity each insurer is willing to tolerate then backing into an appropriate equity allocation based upon large valuation swings, such as 25% or 50%.
Keep in mind that trying to time the market doesn’t work for the vast majority of investors, including professionals. Timing the market insinuates calling the bottom and top of the market and trading accordingly, while being able to outperform the general market performance. Based upon historical, publically available data, if an investor were to miss out on the best five days in the S&P 500 Index over the past 35 years, said investor would experience a total return less than half of what an investor would experience if remaining invested throughout all trading days. This is not to say that buying on the dips will not be beneficial nor is selling when your equity allocation appreciates to your maximum an imprudent decision. The goal should be to determine long-term allocation and percentage exposure, including a target allocation. When the market experiences natural corrections consider averaging in. When market appreciation causes your allocation to grow beyond the upper constraints of your long-term allocation, consider reducing exposure.
We welcome your feedback and would be delighted to speak with you about any specific questions or concerns regarding your investment portfolio. Have an opinion on the recent market volatility? We would enjoy hearing your thoughts on that as well.