Staying Invested Through Market Volatility
Until recent events surrounding COVID-19, market volatility has been fairly subdued by historical standards for the last several years. The longest equity bull market in modern history, political instability, credit cycles, and a host of other factors had progressively been pointing toward a reversion to mean and heightened volatility. During periods of heightened volatility, attempts to time the market and move to cash often lead investors to miss out on market recovery and underperform in the long term. We believe that in the face of short-term volatility, investors are best served by staying the course.
Volatility is Cyclical
It’s impossible to predict short term movements in volatility. However, when viewed through a long-term lens, history has shown that equity volatility has tended to spike every ten to thirteen years (Figure 1).
Source: Morningstar as of 2/29/2020. For illustrative purposes only.
Invest for the Long Term
When markets falter significantly, investors often seek to act quickly to protect their portfolios from further loss, with plans to get back into the market when things stabilize. It is rational to want to exit the market when things go sideways. In fact, the positive impact of missing the worst days in the market has been greater than the penalties for missing the best days in the market. However, there is no sure way of knowing when markets have reached the top or bottom. In most cases, the best course of action is to take no action (Figure 2).
Source: Bloomberg. For illustrative purposes only. Performance data shown represents past performance and is no guarantee of future results.
Although the behavioral desire to market time may be rational, investors have consistently failed to add value in their attempts to time short-term market movements (Figure 3).
Source: Morningstar. For illustrative purposes only. Performance data shown represents past performance and is no guarantee of future results.
Don’t give up on Equities
Although U.S. equities are under significant pressure after one of the longest bull runs in history, the recovery period may not be too far off. Rather than abandon equities and flee to cash or bonds, investors should ensure proper diversification and consider incorporating defensive equities in their portfolios. Despite periodic dislocations and exogenous shocks, the long-term compounding power of equities has been compelling (Figure 4).
Source: Morningstar as of 2/29/2020. Hypothetical example shown for illustrative purposes only. Performance data shown represents past performance and is no guarantee of future results.
Legal Notices & Disclosures
Standard Deviation (Std Dev) of return measures the average deviations of a return series from its mean, and is often used as a measure of risk. A large standard deviation implies that there have been large swings in the return series.
The S&P 500 Index is an unmanaged index generally representative of the U.S. market for large capitalization equities. This unmanaged index does not reflect fees and expenses and is not available for direct investment.
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The views expressed herein are those of Harbor Capital Advisors, Inc. investment professionals at the time the comments were made. They may not be reflective of their current opinions, are subject to change without prior notice, and should not be considered investment advice.
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