In volatile times, remember your time horizon; follow facts not feelings; and, if needed, reposition gradually
Within a matter of weeks, the spreading Coronavirus, tumbling oil prices, recession fears, alarming headlines, and a 10-year Treasury yield well under 1% have thrown a record-high S&P® 500 index into, at least, temporary turmoil. In many corners of the market, the bulls’ decade-long ebullience has been swiftly replaced by palpable panic.
To borrow from Britain’s World War II motivational poster, now is the time for investors to “keep calm and invest on.” In volatile times, we believe investors who remain anchored to three principles—ones at the core of the Pacific Life Fund Advisors (PLFA) investment process—can help manage their portfolios through market panics, whether induced by pandemics, market conditions or headline-makers.
Remember Your Time Horizon
The degree of response to ongoing market volatility should largely depend on your time horizon. Many investors’ objectives stretch over years or even decades. Keeping long-term objectives in mind can allow you to view short-term spikes in volatility as just bumps on the road to your financial destination.
At PLFA, we manage the Portfolio Optimization Funds with a 10-year horizon. We keep our funds consistently diversified across global asset classes to maximize our opportunity set while mitigating risk
from concentrated positions.
Through the recent turbulence, this balanced approach helped Pacific FundsSM Portfolio Optimization Moderate keep pace with global equities when they rallied earlier this year and fare better when they abruptly dropped, including on March 9, when equities fell more than any day since December 2008 (Chart 1).
Follow the Facts
In February, we witnessed the quickest 10% drop in U.S. stocks since the Great Recession, a plunge that shook the confidence of many investors. The resulting cacophony of headlines, tweets, and posts only served to heighten emotions, the enemy of prudent investors who make decisions based on objective data.
This stoic, follow-the-facts strategy dictated PLFA’s approach to the impacts of the Coronavirus. For instance, PLFA had already been monitoring the build-up of inventories by U.S. businesses (Chart 2) due to trade-war concerns. We believe this excess inventory will allow manufacturers to keep selling even as imports from China are restricted or slowed.
PLFA also noted the growing coordination between central bankers and legislators for a joint fiscal and monetary response to maintain a healthy economy over the medium term. In addition, we carefully took note of medical experts such as Dr. Anthony Fauci, the head of the National Institute of Allergy and Infectious Diseases, who led the U.S. government’s response to outbreaks such as Zika, Ebola, and HIV. His Feb. 28 assessment that “overall clinical consequences of Covid-19 may ultimately be more
akin to those of a severe seasonal influenza.”1 All this played a part in our decision to take carefully measured steps amid the sell-off to add more equities to our portfolios.
Investors who thoroughly analyze a potentially market-shifting event may conclude that a portfolio adjustment is warranted because the current risk or opportunity would have a meaningful impact over their time horizon. But trying to time the market is an ill-advised strategy, and implementing a significant rebalance with a single trade amid heightened volatility may amount to more harm than good. If your financial objective is years away, it’s prudent to be deliberate and measured—systematically moving toward your new allocations while assessing new evidence along the way.