Maintaining Equity Exposure in Uncertain Times
Can you afford to stay on the sidelines? It pays to have a plan and stick with it.
There’s no question we are living through unprecedented times. Uncertainty poses a lot of questions for investors as they consider the implications of market volatility, which has settled in as the new norm.
When volatility increases, it’s normal for clients to want to pare back—or even cut—their equity exposure. While that might be appropriate for some, most clients have a long-term time horizon, and paring back exposure under pressure, while tempting, can dramatically impact long-term returns.
Responding to market volatility by paring back equity exposure, while tempting, can dramatically impact long-term returns
Consider the performance of equities over time. The shorter the time horizon the greater the historical likelihood of a significant drawdown.
Taking a closer look, let’s use the S&P 500 as a proxy and examine the rolling returns over 1, 3, 5, 10, and 20-year time frames. Note that rolling returns do not go by the calendar year; instead, they look at individual one-year, three-year, five-year, etc. time periods.
Best and Worst Performance by S&P 500® Index for each rolling period from 1926–2019:
Source: Charles Schwab, How To Manage Times of Market Turbulence, https://www.schwab.com/public/file/P-12613503 , Schwab Center for Financial Research with data provided by Standard and Poor’s. Every 1-, 3-, 5-, 10-, and 20- year rolling calendar period for the S&P 500 Index was analyzed from 1926 through 2019. The highest and lowest annual total returns for the specified rolling time periods were chosen to depict the volatility of the market. Returns include reinvestment of dividends. Indices are unmanaged, do not incur fees or expenses, and cannot be invested in directly. Past performance is no guarantee of future results. Diversification strategies do not ensure a profit and do not protect against losses in declining markets.
The data tells a powerful story: the longer the time frame, the lower the historical likelihood the S&P 500 delivered a significant negative return on an annualized basis.
The same story plays out on the upside. Historically, there have only been a handful of best-performing days for the stock market every year. If you miss those days, you’ll dramatically lower the overall return on your investments.
Think twice about timing the market; missing out on the best-performing days is expensive:
©2020 SIMON Markets LLC. All Rights Reserved. Source: SIMON Markets as of June 10, 2020.
*Analysis of SPXTR for time period indicated to approximate S&P 500 with dividends reinvested. Past performance is no guarantee of future results. Investors should carefully consider the investment objectives, risks, charges, and expenses before investing.
In short, helping clients stay invested even during these turbulent times may be key to helping them achieving their long-term financial goals, while taking into account holding periods and investment objectives. As a financial advisor, you already know this. The challenge can be how to explain and better position your clients, who understandably may get nervous during volatile times.
Timing the market is risky; missing even a few of the 30 best-performing days over a 15-year period can deliver an expensive setback
Presenting clients with the data is a good starting point, but it’s important that you combine that with investment guidance that will help their portfolios better handle market volatility and provide a better risk adjusted return.
Structured investments are one approach that can help, given their flexible ability to reduce equity risk while maintaining upside exposure. A structured investment starts with an ordinary investment, like a stock, an index, or an ETF, that becomes the underlier or reference asset. The structured investment is a package that links to the underlier but offers a different return profile than if you were to invest in the underlier directly.
Sticking with our example above, there are also products called Market Linked Growth Notes that can use the S&P 500 as an underlier to provide some of the upside of the index, while limiting your losses if the market goes down. This is just one example of how structured investments can allow you to remain invested in equities with less downside exposure.
Explore your options: structured investments can help you achieve steady market exposure and embed protective features against short-term drawdowns
Structured investments come in a wide variety of options with different terms and conditions. There’s one for almost any market outlook or investment goal, giving investors the chance to stay in the market and choose how much protection they need to feel comfortable.