These are turbulent times for investors with S&P 500’s volatility at a peak. It’s no longer unusual to see its daily market moves reach 5% or more. As I pointed out in last week’s column, this year’s market behavior is by any historical measure truly unusual. It tests investors’ belief in their asset allocations, security selection and the world’s economic future.
One reaction I’ve seen is giving up and liquidating all equity holdings. This is an emotional reaction; however, it’s understandable given that no investor has been through a period like the one that started on February 19, which hasn’t ended yet and may continue.
This reaction is likely caused at least partially by a misperception of risk. Yes, the market is going through a period of crazy volatility but that isn’t the same as risk. Investors should focus on risk and not volatility. Risk is simply the chance that a stock or a portfolio will suffer an irrecoverable loss — for example, a company going bankrupt resulting in its stock becoming worthless and its bonds collapsing in price.
These indicate investors should focus on two things. First, they should have a portfolio asset allocation that they have confidence in and can stick with through good times and bad. For example, it makes no sense to have an asset allocation 90% in equities, if a not uncommon market correction of 10% will cause the investor to panic and sell out. Second, the securities populating the portfolio should minimize the chances of an irrecoverable loss. This means focusing on "high-quality" securities. For example, stocks and bonds rated "A-" or better by Standard & Poor’s. A portfolio like this should have no problem surviving troubled times and performing solidly in good times. We have already seen many companies with readily recognizable names go bankrupt this year; for example, J.C. Penney, Hertz and Neiman Marcus.
While troubled times do appear occasionally, good times have historically dominated, especially over periods of several years. While the past is no guarantee of the future, it does provide useful context and should be helpful in warding off any prognosticator’s claims of doom.
Based on one study using 50+ years of data, the S&P 500 has been significantly positively biased: 53% of daily returns have been positive; 63% of monthly returns; 69% of quarterly returns; 74% of calendar year returns. If we look at rolling monthly returns: 75% of rolling 12-month returns have been positive; 88% of rolling 60-month returns; 94% of rolling 120-month returns; 100% of rolling 240-month and 300-month returns.
The data indicate that the risk of loss in a well-diversified equity portfolio diminishes significantly with time and becomes negligible (but not non-existent) at 10-years. This suggests the chances are excellent the period we’re now in will be just a blip when we look back a decade from now and investors that don’t panic will do fine. The data also suggest it’s prudent for investors to have enough cash or shorter-term high-quality bonds to get through several bad market years.
All data and forecasts are for illustrative purposes only and not an inducement to buy or sell any security. Past performance is not indicative of future results. If you have a financial issue that you would like to see discussed in this column or have other comments or questions, Robert Stepleman can be reached c/o Dow Wealth Management, 8205 Nature’s Way, Lakewood Ranch, FL 34202 or at rsstepl@tampabay.rr.com. He offers advisory services through Bolton Global Asset Management, an SEC-registered investment adviser and is associated Dow Wealth Management, LLC.
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June 29, 2020 at 05:48PM
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The market’s behavior and your portfolio - Sarasota Herald-Tribune
"behavior" - Google News
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