Markets Move Quickly

Market volatility is not gone.  As you can see below, the volatility index (VIX), which helps quantify the level of volatility, is still at a very heightened level.  Thankfully recent volatility has been of the good kind when markets go up:

Risk & Reward

Volatility, when it is this high, can lead to uneasy feelings in one’s stomach, but heightened risk tends to lead to heightened rewards over time.  This is part of what makes investing hard.  When fear is at a high, it’s easy to look for cover rather than lean into the opportunities.  But as we’ve discussed in some of our recent Wealth Watches and videos, the best days a lot of times are stacked right next to the worst days.

When markets move, they can move quickly.  We’ve seen evidence of that in the last few weeks.  In the three days after the 3/23/2020 market bottom, the S&P 500 moved north by nearly 18%.  In the last three days (through 4/8), we’ve seen the S&P 500 move up by over 10%.  It’s not because it’s safe to go outside now.  It literally isn’t.  We’re all still sitting in our homes and living daily life far different than what would have been pictured just a few short months ago.  But markets move ahead.  Recoveries happen.  That’s factual.  The timing of it is always the question.

Diversification

Something we have continually talked about over time is the benefit of being diversified, but also tilting a portfolio towards portions of the market that help performance over time.  Two of those specifically are small caps and value companies.  The opposite types of companies (large growth) have been dominant in the last several years, but another reminder in today’s volatile market is that this gap can change quickly too.

In the rallies referenced above for the S&P 500, small value outperformed large growth by over 2 and 3%.  That might not sound like a lot, but think, that was over just two and three-day stretches of time.  And right now, we are at gaps in valuations between growth and value, large and small, that are on par with what we saw in the 90s and with the tech bubble.  The disconnect eventually corrects.  Again, the timing is always the unknown.  If we extrapolate the recovery days we are seeing as of late and look back in time to the early 2000s, some significant trends pop out:

Over this 5-year period of time, a small value investor was actually over 26% per year better off than a large growth investor.  This works over time.  It doesn’t matter when exactly it turns, but when it turns, it does matter that your portfolio is properly positioned to take advantage of the valuation gaps this market has provided.  You are positioned this way, and when the benefits come, the reward will be felt.