Welcome Back Volatility, We’ve Missed You!
Last month, in our blog New Client Assets in Today’s Market: A Blessing or a Curse?, we discussed the difficulty advisors have in today’s market deciding where to invest new client capital. The influx of market volatility over the past 3 months has certainly not helped answer that question. But is market volatility all that evil? There have been many articles and industry experts that have opined on the topic.
Many insist that market volatility is not a bad thing, often evoking investment clichés like: “buy low; sell high”, “buy the dips” and “market corrections just mean stocks are ‘on sale’”. These all-too-often-used phrases, meant to calm investors and provide perspective, ultimately do little to alleviate the fear investors have when volatility strikes. This is primarily because they are more subjective, “gut feelings” and not based upon data or facts. And therein lies the rub, as they say.
Welcome to the Party!
Over the course of 2017 the S&P 500 Index had only 9 days of price movements (up or down) that were greater than 1%. Through only one-third of this year, we have already had 30.
For an additional point of reference on current levels of volatility, we’ve compared current volatility levels in the S&P 500 Total Return Index to one year prior.
1Source: FactSet. 3-Mo daily Standard Deviation for the S&P 500 Total Return Index.
Compared to last year, 2018 is experiencing a substantial increase in volatility month over month.
Volatility is often viewed as a negative and a signal to run for the exits. Many investors associate the term with losing money and speak of it as if it were a big bad monster. But as anyone who has seen the movie Monsters, Inc. knows, not all monsters are bad. In broad based volatility lies the potential for profit. We understand that volatility is part of investing and will always exist.
Making Volatility Work for You
With that said, market volatility is not the sole instrument we use to quantify risk, but it sure is helpful. Increased volatility can elicit a fear-based response from market participants making it is easy to see how emotion can slip into the decision-making process. When markets begin to buck the trend and change direction, we believe it is best to have a disciplined and repeatable process to help direct decision making. From our experience, we’ve seen that emotions and investing compare better to oil and water – they don’t mix.
Our quantitative approach to investing embraces market volatility. We can use it to identify opportunities and minute differences between individual markets. Volatility for Global Wealth Strategy (GWS) is the equivalent of spinach to Popeye. By creating clearer differences between asset segments, it gives us further ability to quantify risk and reallocate capital to assets with a more desirable risk profile. It is our emotionless approach that allows us to be extremely effective in these environments. Where other investors see fear, we see opportunity.
Managing client money during times of increased volatility can lead to long days and nights littered with difficult and emotional client conversations.
That said, when viewed through the right lens, market volatility can be seen as a positive – as long as you know where to look and have the flexibility to adapt when market conditions change.
GWS is designed to provide this flexibility and, thus, a counterbalance to your clients’ overall asset allocations. We are here to help you shorten those long days and nights by avoiding emotional, difficult conversations. This allows for discussions containing more than just common clichés.