What is Your Strategy in Volatile Markets?

World stock markets have been increasingly volatile this summer. Returns for market indices have turned negative and the S&P 500 suffered its first 10% correction since 2012. Because of this, I have received several message in my inbox that ponder what do in this environment. A couple of the titles were "What you should do in volatile and uncertain markets" and "When market conditions become volatile, how will you react?" The two main strategies that they suggest are 1) stay the course and 2) a diversified portfolio is the best way to be positioned. While this seems sensible in a bull market cycle, these two strategies do not work in a bear market cycle. Therefore, the most important question is not what to do in a volatile market, but is this a bear market?

Stay the course (doesn't work)

The stay the course theory may make sense if you are an investor that doesn't monitor the markets on a daily basis and can't forecast what is coming next. However if you are paying an advisor, don't you think that they should avoid at least part of a major downturn? At Runnymede, we believe that asset protection is a huge part of investment management and sidestepping just a portion of a major downdraft is not only good for the bottom line but also for a client's physical health. Looking at the chart below, it seems obvious that staying the course has been a poor strategy over the past 15 years. With two bear markets of -50%+, managing risk by lowering equity exposure at peak multiples was the right strategy, not staying the course.


A diversified portfolio is (not) the best way to position for whatever comes next

If you are in your 30s or 40s, most investors have high allocations to equities. Often times they have almost all of their portfolio in equities. To lower the amount of risk, many advisors diversify across market capitalizations, sectors and countries. However, in a bear market, this strategy isn't very effective. Let's take a look at how different equity strategies performed in 2008.


Academic research tell us that during periods of crisis and high stock market volatility, correlations among equity asset classes increase. In other words, stocks move down together and diversification is not enough to protect your assets. It didn't matter if you were in emerging markets (MEMF), small caps (RUTZ), large caps (SPX and INDU), healthcare, international (EAFE) or Apple stock, everything went down significantly.

Reduce risk before the storm

The only strategy that works in a bear market is to reduce risk before the significant drawdown. Don't sell at the bottom of the market -- that is a losing proposition. It is imperative to reduce exposure to risk assets like equities when you are late in the bull market cycle and heading into the new bear. This means moving money to more stable assets like US Treasuries or cash. This will allow you to not only weather the storm which can last 6-18 months but it also allows you to buy stocks that you love at much lower prices!

Are we in a bear market today? In recent weeks, we have written that we believe that the US is heading toward recession, valuations are stretched and earnings are in decline. The writing is on the wall and we believe that we are in the early stages of a bear market. There are times to be aggressive and times to be defensive. This is a time to de-risk and move to safer assets.

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About the Author: Chris Wang

Chris Wang


Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Runnymede Capital Management, Inc.-"Runnymede"), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Runnymede.  Please remember that if you are a Runnymede client, it remains your responsibility to advise Runnymede, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Runnymede is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Runnymede's current written disclosure Brochure discussing our advisory services and fees is available for review upon request. Please Note: Runnymede does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Runnymede's web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

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