Monthly Archives: August 2011

A Wild Ride—Taking a Closer Look at Recent Market Volatility

Due to a previously scheduled two week vacation you have not heard much from us duing this time of renewed volatility in the markets. Although Nero may have fiddled while Rome burned I was actually thinking about what to advise our clients but I had the advantage of being in a 3rd world environment and as Sir John Templeton used to say “away from the noise of Wall Street.” Furthermore one of Compass’ strongest attributes is our “depth of bench” and at all times our partners, colleagues and staff are ready and available to answer any questions any client may have.

The short version / executive summary of our advice is: “Please know that we’re very familiar with your portfolio and your goals and risk appetite. Your portfolio was built for a time like this and our recommendation is to sit tight as you are a long term investor. This too shall pass.” Should the market’s correction and renewed volatility be too much for you to bear please contact your advisor and we can adjust your portfolio to a risk reward profile more comfortable to you.

Increased volatility notwithstanding there is really nothing new on the economic radar.

The chart on the left is the 2007 to present CBOE  VIX which is the ticker symbol for the Chicago Board Options Exchange Market Volatility Index, a popular measure of the implied volatility of S&P 500 index options. Often referred to as the fear index or the fear gauge, it represents one measure of the market’s expectation of stock market volatility over the next 30 day period. The VIX is quoted in percentage points and translates, roughly, to the expected movement in the S&P 500 index over the next 30-day period, which is then annualized.

We know that many of our clients are sensitive to portfolio volatility but notice that now even with the VIX at $38.28 today it is well below the $80 it reached in 2008-2009.

Please also note that while the news media puts the market volatility in your face every minute (why are you watching CNN instead of golfing anyway?), our typical client is invested in a nominal 60/40 portfolio strategy which has an actual equity exposure of only 35%. So approximately 2/3rds of a typical client portfolio is not in “the market”.

The chart to the left is the S&P 500 index from mid 2008 to the present. If you click on the chart you can enlarge it to see it better. Although you can see it has corrected recently it is nothing like 2008-2009.

SEI Investment Management has prepared a commentary called: A Wild Ride—Taking a Closer Look at Recent Market Volatility which can be read in its entirety by clicking through on this link. The summary of both the SEI and Compass Capital view is as follows:
Despite the recent volatility, our view of the markets remains intact. Strategically, the U.S. economy appears to have entered a soft patch from which it is likely to emerge without entering recession. Equity valuations appear attractive to us, and we believe Treasury prices are rich. Unfortunately, markets continue to react in an irrational fashion, and we expect them to continue to do so until the European debt situation is resolved, the U.S. debt ceiling is permanently addressed and the 2012 elections have come and gone. For investors, times like these underscore the importance of employing a time horizon that is appropriate to your objectives, implementing an appropriate asset allocation and maintaining a disciplined approach to portfolio re balancing to keep your goals and your investments aligned. Most of all, volatile times provide a reminder that your investment strategy should be driven by your needs, not by market movements. If short-term market movements cause you to panic, it may be time to reevaluate your investment strategy to ensure that it remains aligned with your goals and time horizon.