Last year alone, there were several instances where volatility spiked, markets retreated, and investors could have strayed from their well diversified long term portfolio allocations for the perceived protection against further losses. If an investor was able to time the initial COVID market sell-off, when would they have bought back in? Would that same investor have sold again during periods in September and October in which we saw the S&P500 correct -9.6% and -7.48% respectively on fall virus surge worries, or again just in the last few weeks as the market (specifically growth and long duration assets) struggled with inflation worries from a fresh round of $1.9T in fiscal stimulus, a reopening economic comeback story, and a historically high M2 supply? Not only would that investor be risking performance as we see in the data, but also dabbling in a highly tax inefficient strategy. This is all in the context of a market in which the S&P500 index ended up setting 33 record closing highs during 2020.
Source: Chicago Board Options Exchange, CBOE Volatility Index: VIX [VIXCLS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/VIXCLS, March 14, 2021.
While past outcomes are not a determinant of what the market will do moving into the future, we can say with certainty that increased volatility stemming from the movement in interest rates is here to stay for the time being. Market pullbacks of 5-10% within the context of a longer-term secular bull market should be expected. Wellspring will continue to advocate for well diversified, all-weather portfolios built around optimized risk budgets to navigate the volatility, stay the course, and meet our families planning goals now and for the long term.