News & Media

When Things Settle Down

Jeremy Hutzel | Mar 21, 2020

In my email Monday I mentioned that one of the most repeated phrases I hear during volatile times is about "sitting tight till things settle down." Or "I'd like play defense / protect until things look a little better."

I wanted to follow up on that point with an illustration of how devastating such a seemingly simple decision can be. Paul McKanna pulled a couple of charts for us. Below you will see the Global Stock Market and the U.S. Stock Market since March 2009. A wealthy investor whose Global Market portfolio fell to $1,000,000 at the market nadir in March 2009 and stayed the course would have $2,205,299 profit by March 2020.

But what about the investor who decided to sit out for just ninety days? In March 2009, when his or her portfolio dipped to its $1,000,000 low this investor went to cash for just ninety days. They reinvested in June 2009. (Let us not ignore the fact that things didn't look better in June delinquencies were still rising, unemployment was still rising, etc,. but nevertheless, he or she got back in).

He or she still experienced a $1,201,885 profit by March 2020. But that is a difference of over one million dollars! For just three months out, waiting for things to stabilize a bit. The example is extreme....going all out and all in the markets. But it helps to illustrate the extreme ramifications of hasty decisions in times of volatility.

As I mentioned on Monday, the best days in equity markets are often clustered around the worst. Volatility spikes are a part of life and we cannot separate return from risk.

I don't know when the volatility will subside. My best guess is it will take a strong fiscal response (before the spread of the virus slowing), which will require legislative agreement. Will that come before Monday morning? Unlikely, but possible. What is more important is confidence that there will be some form of fiscal response. Thus far, it's been effective in China. Australia announced stimulus this morning. It will come in the U.S., but (perhaps unsurprisingly) is taking a bit longer given our divisive political system.

We welcome the opportunity to talk to you about the market and its implications on your financial plan.

Talk to you soon,

Jeremy Hutzel, CFA, CFP®

All charts provided by RiskAlyze.

The Risk Number of 71 and the 95% Probability Range of -15.41% to +21.35% was calculated using a long-term average of 00.00% for the S&P 500, 0bps change in the Ten Year US Treasury Rate, and correlation and volatility data from 2008 to present. Riskalyze uses actual historical data to calculate the statistical probabilities shown. For securities calculated using Average Annual Return, the Average Return will be calculated using actual price history from June 2004-present or inception. We calculate the annualized return number as ( final price / initial price ) ^ ( 1 / number of years ) - 1. Riskalyze does not provide investment analysis on investments with less than 6 months of historical performance. In instances where an investment’s inception is more recent than January 1, 2008 and greater than 6 months, Riskalyze will use correlation statistics from the investment's actual trading history to extrapolate missing volatility data. In most cases the extrapolation calculation increases the risk presented in the investment analysis as a means of protecting the investor. Investments with an inception more recent than January 1, 2008 are highlighted with an information icon. The Six Month 95% Probability Range is calculated from the standard deviation of the portfolio (via covariance matrix), and represents a hypothetical statistical probability, but there is no guarantee any investments would perform within the range. There is a 5% probability of greater losses. Riskalyze does not use any Monte Carlo or any other type of simulations. The underlying data is updated as of the previous day’s market close price, and the results may vary with each use and over time. The investments considered were determined by the financial representative. IMPORTANT: The projections or other information generated by Riskalyze regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. These figures may exclude commissions, sales charges or fees which, if included, would have had a negative effect on the annual returns. Asset class representations for this portfolio exclude individual security allocations that result in net leveraged or shorted positions for a particular asset class.

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