All Eyes On The Fed Today—And How To Handle Equity Market Volatility For Your Portfolio

Extreme market volatility — with the fear and greed that comes with it — can lead investors to make emotional rather than logical decisions. And market timing can be an expensive habit.

Stocks are once again moving in lockstep, in risk-on/risk-off mode. The market is currently focused on Fed action and higher borrowing costs, which are putting economic growth in jeopardy. Last week, hotter-than-expected August CPI triggered an S&P 500 decline of more than 4 percent on Tuesday, with growth stocks falling more than 5 percent. For perspective, last Tuesday was the worst performing day for the S&P 500 since mid-2020 as we covered news about the delta variant and its implications. Additionally, last week’s market action followed two sessions in which 400 of the 500 stocks in the S&P 500 rose.

With such extreme market movements, it is difficult to maintain the invested course. Depending on how our stock portfolios are positioned, many of us feel brilliant, happy, or just plain scared –

While volatile times can pave the way for active managers to shine, the price of getting even a few things wrong in today’s volatile and correlated markets is expensive. And we already know that there are few active managers who actually outperform the market over time.

Bad timing can put any investor at a significant disadvantage, especially if they are not invested during the biggest one-day market gains. Not investing on the best five days of 2022 so far increases the S&P 500’s annual loss from 19 percent to 30 percent, according to Bloomberg News. For more on this topic, see my previous column on the dangers of missing big market move days – “Why Market Timing Is Still a Bad Idea”.

So it’s important to stay invested. According to Olivia Schwern, global investment strategist at JPMorgan, there have been 51 days since 1980 when the S&P 500 has fallen more than 4% in a single session, like last week. 21 of those days happened during the 2008/2009 global financial crisis and another 9 in 2020. After each occurrence, the market rallied and hit new highs.

And next, it’s crucial to harness the power of long-term diversification in your portfolio. Yes, fixed income can be your friend — in fact, many investment professionals specifically view fixed income as baggage in their portfolios that allows them increased equity exposure. JPMorgan reports that while rolling 12-month stock returns have varied widely since 1950 (ranging from +60 percent to -41 percent), a 50/50 mix of stocks and bonds has not suffered a negative annualized return over any rolling five-year period last 70 years.

I’ll add the caveat here that one also has to consider the time frame for investing — for example, if you’re retiring at age 60, you might want to review diversification in your portfolio and drive a lower-risk profile. No one wants to be caught in down markets with a limited time frame.

Well-formulated, diversified, multi-asset portfolios help investors achieve their financial goals in all types of market environments. As JPMorgan’s chart below further illustrates, the market needs a 25 percent return from current levels to return to previous highs. Even if it takes three or four years, the compound annual return needed is roughly in historical range at 9 percent and 7 percent, respectively.

Sure, it’s tempting to predict market direction, but a well-formulated and diversified portfolio remains the surest way to participate in volatile markets.