By Tim Courtney, Chief Investment Officer
The uncertainty and expected market volatility being generated by the upcoming presidential election is causing unease for investors across the country. Additionally, even though we are currently experiencing a recovery in both markets and the economy, COVID-19 is still affecting consumer behavior, hampering a broader recovery and creating its own uncertainty.
Some are wondering whether they should remain invested given all of these variables or potentially avoid markets until the political and health environment is more certain. Below, we outline some reasons why making portfolio changes because of uncertainty can carry its own set of risks.
1. Market behavior in the near term is unpredictable. This fact is the very reason some are considering avoiding markets for now. However, markets are always unpredictable and there are risks and variables we often discount or ignore. This year is a great example. We entered 2020 on a very high note — wages were increasing, household incomes were healthy and markets were strong.1 Then, in one month, everything reversed. No one was predicting that 2020 would bring the fastest bear market on record followed by the best 50-day period in market history.2
We don’t know how markets will factor in these multiple variables (vaccine timeline, presidential and Senate elections, consumer confidence and spending, etc.). We do know that equity markets attempt to set prices at a level where current investors can expect positive future returns given the risks and growth the market is forecasting.
2. Timing risk should be avoided. When an investor makes significant changes to their portfolio, they introduce an additional investing risk: timing risk.3 Ideally, timing risk is something that should be managed by finding an appropriate asset allocation so that near-term market swings won’t adversely affect future cash flows. Meaningfully changing asset allocation creates timing risk as some level of speculation is introduced into the portfolio.
3. There are costs involved. While trading fees have largely decreased over the years, there are still costs to consider when entering and exiting the markets (namely, taxes). There are also costs when moving assets from areas with higher expected returns into areas with lower expected returns. These costs must be overcome to make a change profitable to the investor.
None of this is to say we expect calm markets ahead. Markets very well may correct during the next several months as new information is presented to investors (a 10% or greater correction happens about once every year to year and a half on average4). This is the unpredictable nature of markets but is the very thing that gives stock markets higher expected returns than cash or bonds. We do expect higher than normal volatility ahead during our current recovery as employment numbers slowly improve and corporate earnings make their way back to 2019 levels. Investors should be better off avoiding the constant noise of near-term data (that is always being incorporated into market prices) and focusing on their longer-term plans and goals. For most of us, that means remaining invested in markets.
Sources:
1. NPR (9/15/20) – American incomes were rising, until the pandemic hit
2. Yahoo! Finance (data as of 10/1/20) – S&P 500
3. Investopedia (9/15/20) – Timing risk
4. Grow (6/21/19) – How often do stock market corrections happen?
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
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