This is an ugly market. If the month closed today, then this would rank in the worst 3% of months since the 1920s. The only months that were worse for the S&P500 since the Great Depression in the 1930s have been October 1987 (-21.6%), August 1998 (-14.5%), September 1974 (-11.7%), September 2002 (-10.9%), November 1973 (-10.8%), March 1980 (-9.9%), and the current month (-9.2%). There are still seven trading days left, so it could get much worse.
To illustrate how seriously this downturn is being taken, the Federal Open Market Committee (“the Fed”) had a surprise 0.75% cut in the federal funds rate Tuesday; the largest cut since August of 1982 when the rate was at 12.5%.
I am not going to make predictions about the economy, global markets, S&P 500 index valuations, etc. I will leave the crystal ball gazing to others, of which there are plenty.
The core question many investors are asking is what should we do now? That answer should be very simple and straightforward. You should continue to implement your plan, as laid out in your investment policy statement. The middle of a crisis is not the time to panic.
There are basically two strategies to deal with extremely volatile markets; a buy-and-hold, market based strategy or some form of active management, market timing strategy.
If your strategy is the buy-and-hold, then you may be looking to rebalance your portfolio or use this as an opportunity to realize some losses for tax purposes, but overall, you are just following the principles of your investment policy. It just happens that with a buy-and-hold market based strategy, it is volatile periods, either up or down, that create the imbalances which require attention. (The term “buy-and-hold” is misleading, since there is trading. What buy and hold implies is that there is no market timing going on, but rebalancing to a model allocation and realizing losses for tax reasons is very much a part of a buy and hold strategy.)
However, if your strategy is active management, a market timing type strategy, then if you have not done anything by now, it is probably too late. The reason market timing is so difficult over time is not because it is hard to get out of the market. Rather, most market timing strategies fail since they miss the recovery. Historically, the recovery happens much faster than the crash.
If you do not have an investment policy, then by default, your current strategy should probably be a buy-and-hold, market based strategy. The exception to this is if your current investments are not well diversified.
With a good investment policy, market crashes are not a concern. They are the short term risk we bear that gives us the expectation of higher returns over the long run. While we never know when months like this will happen, with a good investment policy it should not matter. Either your portfolio is designed to ride through these difficult markets, or you timed out of the market 3 months ago and are getting ready to get back in.
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