Update on Volatility August 2019

Robert Luft

August 16, 2019

Market & Economic Environment:

Volatility has returned with a vengeance.

Continued trade tensions between the US and China, concerns over the inversion of the US yield curve, and a lack of consensus between the US federal reserve and the POTUS has resulted in massive fluctuations daily in the value of publicly traded securities.

When looking at SPY, a broadly traded ETF tracking the top 500 stocks in the US, it has dropped over 5.4% from July 31^st to August 14^th.

What about longer term?

SPY closed August 14^th, 2018 at almost the exact same level it closed August 15^th, 2019. (source MORNINGSTAR direct)

Our Strategy: reduce volatility compared to equity markets through diversification so you stay the course towards your long-term goals

A year is not “long term”, but in today’s world of instant media, and increased volatility, it can seem like forever, especially when investment firms focus you on the short term by sending you monthly statements.

The importance of maintaining your chosen strategy, or level of risk, is to avoid “buying high and selling low” over periods under three years.

In the course of your investment lifetime, whether your portfolio is for retirement income now, or in the future, volatility will be a constant in the periods of time under three years in any portfolio that is actually invested in anything other than cash like investments.

You must gauge the degree of volatility (dollar losses on paper) you are comfortable with because there will always be another event and capital markets will always react. The only way to avoid volatility is to not be invested. Money for the short term, (periods up to three years) with no volatility, is not an investment: it is cash. In cash you will earn nothing after inflation and tax over the long term. This is where you park your funds in a high interest savings account, GIC or at the worst, your online banking account.

Therefore, your success as an investor will be your reaction to this short-term volatility as it pertains to your long-term portfolio.

Failure will be due to reacting to short term events and fully changing your strategy.

If you do try to change your strategy during these moves, often times you will be wrong:

Take for example an investor who reacted by selling US positions at the end of 2018.

They would have missed a rally of over 20% in the US index, SPY, year to date.

The key to managing your emotions?

We believe that a diversified pool of assets that we manage in your portfolio, will help you to sleep at night regardless of short-term fluctuations over periods of a day, week, or even a year.

Let’s assume the pure capitalist portfolio is simply buying SPY: you own 100% of the largest 500 companies in the US, and arguably the world. Your future is 100% tied to the fluctuations of global capitalism: in periods of growth you get all the upside, but in periods of decline you get all the downside. Most people LOVE the upside, but cannot handle the inevitable drops.

Over longer periods of time (10 years) your AVERAGE returns would be the highest. Your short term swings, however, could be gut wrenching.

For example: from October 1^st, 2018 to Dec 24^th, 2018, SPY dropped 20.2%.

That would mean that a hypothetical $250,000 Portfolio fully invested in the US market would have seen a dollar value drop of over $50,000, to under $200,000.

While you may have wanted to get all of the growth of the US market over the longer term, if you cannot handle the ups and downs you risk being the classic “buy high, sell low” investor.

Ask yourself how you would have reacted emotionally to that kind of drop in the value of your portfolio.

These kinds of short term (3 months in this case) volatility spikes occur in capital markets on a regular basis.

Many people are tempted to chase equity markets when the media draws attention to their rise, then bail out during periods of decline.

Smart investors, however, will not overweight, or put “all their eggs” in one proverbial basket.

While this means you don’t get 100% of the growth of capital markets when they are on the upswing, it also means your monthly, quarterly, or annual drops should be more palatable allowing you to stay invested, maintain your portfolio and focus on your long-term goals.

Please contact any member of the team if you have questions regarding your portfolio.