Over the last two weeks, we have seen the most volatile capital markets since the financial crisis of 2008. The Volatility Index (VIX), which measures the implied volatility of options on the S&P 500 of U.S. Large Cap stocks, is at a level last seen during the 2008-2009 period.
The speed of the selloff has been extreme, but the damage so far is fairly limited. The Total Return of the S&P 500 Index is approaching its previous level of December 2018.
During this period of heightened volatility, we remain vigilant but are concerned that we might not yet have seen the end of the selling pressure. Hence, we are modifying our policies on rebalancing portfolios and investing cash.
- Until we see a return to more normal levels of volatility (i.e., VIX less than 40; WHAT IS IT TODAY?), we will no longer automatically rebalance portfolios. Almost all of our client portfolios are currently under-weighted in stocks and hence over-weighted in cash and bonds. This market environment is not beneficial to trading because much of the news affecting the markets occurs after normal hours of operation. When the market opens and stock prices can respond to new information, we often see large gaps in price appear, sometimes on the order of 5% to 7%. This erratic action makes it difficult at best to calculate dollars needed to rebalance portfolios. We don’t want these gaps in price to adversely affect the rebalance process.
- Likewise, we will no longer automatically invest new dollars into a portfolio. If you absolutely feel compelled to invest money that you will not need over the next five years, please contact your Financial Adviser on how to implement a plan. In general, we recommend a Dollar Cost Averaging (DCA) approach, which divides cash into groups or tranches that can be invested over a period of time, say 3 to 6 months. DCA can be a good way to exercise discipline in spreading market risk out through time by not concentrating your investment at a single price level.
The Sentiment Cycle indicates that we may be approaching the most profitable time to purchase stocks as public emotions move from “Panic” to “Despondency.” Central bankers and governments are actively taking a stance to repair the frayed confidence of investors worldwide. Although the U.S. response may started late,, it’s quite clear that the full weight of national resources will now be applied to solving the coronavirus problem. Americans have often been slow to act early in a crisis but have always responded in an overwhelming manner once we face reality. America’s entry into World War II after the devastating surprise of Pearl Harbor is just such an example. We waged global war on two theaters simultaneously and achieved total victory once the American people were united behind a single cause.
I often refer to the Sentiment Cycle chart to help investors deal with their emotions. Our emotional response to money is visceral, something that touches all of us deeply. If we can learn to respond to market movements with our brains and not just our guts, we will most likely improve our long-term results. The highest market returns normally come after experiencing our worst emotions of sadness and loss. Consequently, the lowest returns normally come after periods of enjoying thrill and excitement.
There are a lot of unknowns about the virus, the market, and government/agency responses. At Telarray, we try to focus on things that we have control over, not on things outside our reach. We still believe that a long-term approach is the best way for most people to invest their hard-earned capital. So far, we have harvested over $9 million of tax losses in client accounts where it was appropriate. We are evaluating for the opportunity to rebalance portfolios as soon as we see the Volatility Index start to return to more normal levels. Also, we are helping clients put a plan in place to invest new money into their portfolios. We firmly believe that the market will offer tremendous value at the bottom for investors who stay the course.
These can be scary times for all of us. Please don’t hesitate to contact your Financial Adviser, me as the Chief Investment Officer, or anyone else on staff here at Telarray with your concerns. No question is too trivial for our review. We are most sincerely appreciative of the trust that you have shown in us. We take our business of caring for you with the utmost dedication and humility. We think that it is times like these when we earn the right to be your Financial Adviser.
Yet the most important take-away is to please take care of your family and friends during these trying times. Stay safe.