Volatility is creeping back into the market in early 2014 after a long slumber, leaving some investors anxious and unsure about how to prepare for more turbulence.
The CBOE Volatility Index (VIX) has broken above 20 and the S&P 500 (SPX) is down about 6% from its all-time highs as investors fret over emerging market currencies and recent signs of weakness in the U.S. job market.
The pullback may feel worse than it really is to some because the S&P 500 hasn’t experienced a 10% correction since the summer of 2011. As a result, many financial advisers have been inundated with calls from jittery investors in February, and trading volume has picked up lately along with volatility.
Many investors are wondering if this is simply a healthy pause for breath after the big rally in 2013, or the market potentially reverting back to the risk-on/risk-off regime that has often prevailed after the financial crisis. A weak January may not bode well for stocks for the rest of 2014, and investors are also watching new Fed chair Janet Yellen and the possibility of further tapering from the central bank.
Of course, investors shouldn’t throw away their long-term investment plans every time the market suffers a correction. However, now might be a good time to revisit their portfolios and their tolerance for risk, especially after such a prolonged rally in U.S. stocks without a meaningful pullback. Some investors may be overly complacent after the low-volatility climb, but now the VIX has jumped to a one-year high.
The VIX may feel elevated after a long subdued period, but the 30-year average for the VIX is actually 20, according to ConvergEx Group.
“What does seem clear is that markets will remain volatile for some time,” CovergEx said in a recent note. “That’s Old Normal price action. It may take some getting used to, but ultimately that’s how capital markets are supposed to work.”
In our 2014 outlook, we roughly sketched four potential market scenarios for the year, including some Covestor portfolios that could make sense if volatility rises.
Also on our platform there are managers who run diversified portfolios that invest across asset classes using ETFs, and many of these portfolios have Covestor’s lowest proprietary risk scores.
Additionally, our Investment Management Team has introduced the Risk Protection Multi-Manager portfolio. This strategy is a “bundle” of five individual Covestor portfolios selected by the IM Team. Risk Protection Multi-Manager portfolio is designed to potentially provide less volatility and drawdowns than a broad market index such as the S&P 500, and is geared to perform similarly to a balanced portfolio with a mix of stocks and bonds.
The bottom line is that a smart diversified portfolio including some exposure to emerging managers can help investors navigate volatile markets.
Read more about Covestor’s investment philosophy.
Photo Credit: Randy Le’Moine Photography
Disclaimer: The information in this material is not intended to be personalized financial advice and should not be solely relied on for making financial decisions. All investments involve risk and various investment strategies will not always be profitable. Past performance does not guarantee future results.