The markets have changed. Your portfolio has to as well.
- by Adil Mohammed, CIM®, QAFP™, FCSI®
- February 26, 2021
Ever feel like things just aren’t the way they used to be?
Some people might accuse you of misplaced nostalgia. But the fact is this: when it comes to the markets, you’re absolutely right. Things have definitely changed. So, portfolio strategies that worked 10 or 20 years ago need to be evolved and adapted accordingly.
What exactly has changed? Mainly these two things:
- The market moves much faster than ever before.
- Government and central banks have adopted very aggressive monetary and fiscal policy amid COVID-19, and they’ve done it very quickly.
Consider the average time it used to take for a market correction to return to break even – for a market to go from peak to trough, and back up to the same peak. The average speed of that journey, going back to 1928, is 26 months.
Then came 2020. The big drop – the 34% decline in the S&P 500 that occurred between February 19 and March 23 – took 23 trading days. The recovery of that loss took 97 trading days. That’s a total of six months, meaning that last year we experienced the fastest 30% bear market from an all-time high in history, and the second-fastest recovery from a 30% bear market in history.
Was this kind of gyration an isolated incident? No. Something similar had occurred in the very recent past: at the end of 2018, the market dropped 20% from October to December and recovered in just the first four months of 2019.
It’s clear: the speed of markets is unprecedented and here to stay.
Government and central bank intervention
Spending stimulus has been massive and historic. Consider:
- unprecedented spending on CERB and multiple lending programs to businesses and governments
- increased unemployment benefits
- the US Federal Reserve easing borrowing and injecting money into the economy to maintain liquidity
- interest rates going to nearly zero worldwide
What’s driving these changes?
Technology is a major factor. Algorithmic trading. High frequency trading. High speed computers that allow institutional traders to buy and sell in nanoseconds. The media raising pulse rates by pumping out financial news and analysis second-by-second. Social media hypercharging it all by instantly propagating information – and misinformation. Trading apps providing the masses with access, speed and convenience unthinkable by your investment advisor circa 2000.
The second major factor is the pandemic. In answer to COVID-19, government and central banks had no choice but to go big and move fast to keep the economy afloat, because the alternative was permanent economic damage and possibly an economic collapse. Policy makers vividly remember 2008 when they were criticized for acting too slow and with not enough firepower, arguably delaying the recovery and contributing to years of slower growth.
What’s it all mean?
It means that strategies that worked in the past, like the traditional portfolio comprised of 40% bonds and 60% equities (or the similar strategy of matching the percentage of bonds in your portfolio to your age), likely won’t meet your return needs and thus need to be revisited.
It means that safe assets like bonds, GICs and cash, that rewarded savers and conservative investors by paying income, will no longer provide a real return.
It means that currency debasement driven by all the money being printed and low interest rates is boosting a fear of inflation that has pushed investors to protect their purchasing power by favouring equities and alternatives (Bitcoin, for example).
It means that investors are forced to move up the risk curve in search for return.
All of this means that portfolio construction is more important than ever.
It means you must build a portfolio that is flexible and can adapt quickly to changing market conditions.
It means those portfolios must include additional asset classes such as alternatives, real estate, exchange traded funds, gold, infrastructure, foreign currency and more.
Because the fact is that volatility – both to the upside and downside – is here to stay, and we must get used to it.
Markets have changed. Your portfolio has to evolve as well. And it has to keep changing, so one thing never does: your ability to wealth the way you want to.
Want to talk about any aspect of this blog? Please contact me anytime at firstname.lastname@example.org.
CLICK HERE for the other story in this month’s Surroundup: Gillian presents at Power2Women Conference