Volatility Through A Different Lens

Posted on April 24, 2020 by Gemmer Asset

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“Every time I get accustomed to low volatility, like we were towards the end of the Greenspan era, and we think we have all the levers under the control… something erupts to remind us that the idea that anybody is in control of everything is hubris.”


-Lloyd Blankfein, ex-CEO Goldman Sachs


The point Blankfein is making here is that there are black swan type of events that are impossible to plan for and the idea that someone can control for every possible scenario is simply foolish.


Of course we can’t control for an out of nowhere global pandemic. We can’t control how certain asset classes react. But we can control how we allocate our portfolio and the context in which we view its performance.


We thought it would be helpful to view the current volatility through two different lenses: first as it relates to a single index and second; volatility of diversified portfolio returns.


Single Index


Percentage Moves
This is just the absolute value of daily percentage moves in an index. The chart below shows the number of days in each of the last 20 years where the S&P 500 moved +/- 2% in a day.



The first thing that jumps out from this chart is just how volatile 2008 was – seventy-two days had moves of at least 2% and thirty-nine of those days occurred in the 4th quarter alone! So far in 2020, we’ve had thirty such days, which would put us on pace for about ninety-eight days for the year. That’s nearly 40% of the trading days in 2020 – pretty scary.




The VIX is an options-based benchmark that’s used to measure expected volatility in the S&P 500. Without getting too deep into the weeds on how it’s calculated, we’ll just say that it’s widely cited and heavily used in all sorts of portfolio management calculations. But it derives its value from measuring a single stock index.



The VIX topped out at 82.69 on March 16th of this year, surpassing 2008’s levels to become the highest reading since its inception in the early 90’s. While it’s come down significantly from that high, today’s level is by no means low.


Anytime something is worse than 2008, it grabs headlines.


A Different Lens


While daily S&P 500 movements and VIX readings grab all the headlines, they only measure the volatility of one specific asset class. Most people are (hopefully) invested in a much more diversified portfolio with a risk tolerance that’s appropriate for their long-term goals. Viewing volatility through the lens of a properly diversified portfolio paints a very different picture.


Let’s create a very simple but diversified portfolio made up of 60% global stocks (MSCI ACWI Index) and 40% Aggregate Bonds (Bloomberg US Aggregate Bond Index) and look at the daily percentage moves just as we did for the S&P 500.



Year-to-date there have been only ten days where this 60/40 portfolio has moved +/- 2%. Compared to just the S&P 500, we reduced the equity allocation by 40% but the number of daily 2% moves went down by two-thirds. Ten 2% days out of a possible seventy-seven trading days is volatile, but certainly not headline grabbing.


How does this translate to returns? The chart below shows the year-to-date performance of this same 60/40 index portfolio versus the S&P 500.



A few things stand out about this data. First off, we’re in the midst of a global pandemic that has caused much of the world’s economies to suddenly stop and the S&P 500 is only down -12.8% for the year! Second, introducing bonds and international equities to the mix significantly softened the losses – the simple 60/40 index portfolio is only down -7.6% YTD. Granted this crisis is not over and things could get worse, but given all that has happened over the past two months, being down single digits really puts the headline volatility in perspective.


So while news outlets like to quote Dow points, S&P percent declines and occasionaly the VIX, the average investor hasn’t really experienced a large drawdown thus far. But, without viewing this volatility through the correct lens, you may talk yourself into making big changes – i.e. selling to cash and trying to time getting back in. These big changes to your portfolio during times of volatility almost never work out well and the current crisis is a perfect example. From the low on March 23rd, the S&P 500 was up +17.6% in 3 days! That’s barely enough time for a trade to settle – the idea that you can time both the top and bottom of markets like this with any degree of consistency is insanity.


Lloyd Blankfein is right, from time to time events will come along that remind us we’re not in complete control. However, if we control what we can: diversification, appropriate risk tolerance and viewing market news through the right lens, we may just avoid making decisions that decrease the risk of meeting our long-term financial goals.


Has volatility picked up? Absolutely. But for the average investor, volatility should be viewed in the context of your portfolio, not a single index.





Published by Gemmer Asset Management LLC The material presented (including all charts, graphs and statistics) is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The material is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objective, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this material is suitable for their particular circumstances and, if appropriate, see professional advice, including tax advice. The price and value of investments referred to in this material and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or prices of, or income derive from, certain investments. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of Gemmer Asset Management LLC (GAM). Any mutual fund performance presented in this material are used to illustrate opportunities within a diversified portfolio and do not represent the only mutual funds used in actual client portfolios. Any allocation models or statistics in this material are subject to change. GAM may change the funds utilized and/or the percentage weightings due to various circumstances. Please contact GAM, your advisor or financial representative for current inflation on allocation, account minimums and fees. Any major market indexes that are presented are unmanaged indexes or index-based mutual funds commonly used to measure the performance of the US and global stock/bond markets. These indexes have not necessarily been selected to represent an appropriate benchmark for the investment or model portfolio performance, but rather is disclosed to allow for comparison to that of well known, widely recognized indexes. The volatility of all indexes may be materially different from that of client portfolios. This material is presented for informational purposes. We maintain a list of all recommendations made in our allocation models for at least the previous 12 months. If you would like a complete listing of previous and current recommendations, please contact our office.


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