- The stock market is always on the move, often taking investors’ emotions along for the ride.
- Many investors are comfortable with passively following an equity index that is trending higher, but they tend grow anxious when the market pivots lower.
- This nervousness can lead to snap investment decisions that end up being detrimental over the long term.
Global equity markets have been remarkably busy in 2020 so far. Volatility accelerated into March on heightened investor anxiety about the coronavirus outbreak and its uncertain impact on global growth and corporate earnings. With emotions running high, investors today may have difficulty recalling that they were generally were filled with optimism just two months earlier—when equities rang in the New Year with above-average annual performance.
This serves as only the latest reminder that the stock market is always on the move, often taking investors’ emotions along the ride. You may remember that the latest bull market in U.S. equities (as measured by the S&P 500 Index) reached its tenth birthday in March 2019. You may also remember that the oldest-ever bull seemed to celebrate over subsequent months by moving into new-high territory. What is perhaps more difficult to recall is that this historic performance was preceded by dramatically different performance just a few months prior: During the fourth quarter of 2018, amid concerns about rising interest rates, trade tension and softening economic growth, the S&P 500 Index plummeted toward bear-market territory (defined as a 20% decline over two months or more).
Investors were understandably rattled by the performance of U.S. equities that final quarter of 2018—particularly given the nearly unprecedented market calm of 2017. They also had no way of knowing that the aging bull was actually very much alive and would soon reach new heights. Unfortunately, those who acted on their anxiety by abruptly fleeing the market did not just abandon their equity holdings—they also abandoned the chance to benefit from the rebound of the S&P 500 Index that followed a few months later.
We think this serves as a cautionary tale against making invesment decisions based on emotional recations to market volatility. It’s important to remember that markets are always on the move. SEI’s Stability-Focused Private Client Strategies are designed with this in mind, for investors trying to mitigate possible losses while also striving to either maintain principal or grow wealth over the long term.
A More Stable Path
Our Stability-Focused Strategies are devised to help investors pave a potentially more stable path toward achieving their financial goals. As such, they take a relatively conservative approach to investing that is underpinned by a sophisticated focus on risk management:
- Each Strategy has an explicit “drawdown target,” meaning we aim to keep investment losses within a maximum percentage drop (measured relative to the Strategy’s historical high value).
- Each Strategy holds traditional fixed-income and cash investments, as well as stocks via mutual funds that have a lower risk profile than the broader equity market.
- Each Strategy invests in a mutual fund that holds specialized multi-asset investments meant to provide extra risk mitigation when markets decline.
A Focus on Stability
We apply “behavioral finance” concepts to our Stability-Focused Strategies—that is, when it comes to managing risk, we consider how investors typically perceive and respond to risk in their personal financial lives. Our aim is to reduce the risk of loss by steering investors away from making rash decisions in the face of a market downturn.
In an effort to keep the focus on stability, our Stability-Focused Strategies emphasize diversified asset allocation by including multiple risk-management functions. For example, within the equity allocation, we include funds that seek to invest in lowvolatility stocks. Within the fixed-income space, we generally use funds that invest in short-duration bonds. The non-traditional portion of the Strategies, multi-asset funds, represents the active component that can allow the portfolio to weather volatile market environments over time.
Our approach was put to the test over the past three years, as the equity market experienced everything from steady calm to sharp declines and dramatic rebounds. In this relatively short time period, our Stability-Focused Strategies delivered on their stated objective to help investors aiming to maintain principal or grow assets while seeking to limit the risk of loss (Exhibit 1).
Exhibit 1: Stability First
Stability Delivered in Market Selloff
When the market selloff accelerated toward the end of 2018, SEI’s Stability-Focused Strategies succeeded in their objective of helping investors manage the risk of loss. As illustrated in Exhibit 2, not only have our Stability-Focused Strategies demonstrated significantly less volatility compared to the broad equity market over the 12-month period ending February 29, 2020, they appeared to remain less volatile even after the Index plummeted into bear market territory (when an index declines 20% or more from its last peak) and had its worst one-day plunge since 1987 on March 12, 2020.
Staying the Course
The market is always on the move. When it’s up, most everyone is happy. When it drops, it can be easy to overreact. Fear can tempt even the most disciplined of investors to make snap decisions to pull out of struggling investments. In doing so, they may undermine long-term success; it’s impossible to know precisely when to reinvest after a downturn, particularly one that is short-lived.
Since the stock market began its steady climb after the global financial crisis, not one of our Stability-Focused Strategies has fallen below its drawdown target. While this may not always be the case, we think it supports our belief that monitoring stability-focused drawdowns and standing ready to help mitigate the risk of future losses is yet another way in which SEI can help you stay on course in pursuing investing goals.
Glossary
Glossary: Drawdown refers to a peak-to-trough move down for an investment within a specific period of time, usually measured in percentage terms.
Index Definitions: The S&P 500 Index is an unmanaged, market-weighted index that consists of 500 of the largest publicly-traded U.S. companies and is considered representative of the broad U.S. stock market.
Glossary
Drawdown: A drawdown refers to the high-to-low decline over a defined period for an investment and is usually calculated as the percentage move lower from the recent high to low.
Index Definitions
S&P 500 Index: The S&P 500 Index is an unmanaged, market-weighted index that consists of 500 of the largest publicly-traded U.S. companies and is considered representative of the broad U.S. stock market.
Index returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. Important Information This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results.
This information should not be relied upon by the reader as research or investment advice and is intended for educational purposes only. There are risks involved with investing including loss of principal. There is no assurance that the objectives of any strategy or fund will be achieved or will be successful. No investment strategy, including diversification, can protect against market risk or loss. The following risks may apply to the underlying investments: International: International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets: involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Bonds and bond funds: are subject to interest rate risk and will decline in value as interest rates rise. High Yield Bonds: High-yield securities may be more volatile, be subject to greater levels of credit or default risk and may be less liquid and more difficult to sell at an advantageous time or price to value than higher-rated securities of similar maturity. Treasury Inflation-Protected Securities: can provide investors a hedge against inflation, as the inflation adjustment feature helps preserve the purchasing power of the investment. Because of this inflation adjustment feature, inflation protected bonds typically have lower yields than conventional fixed rate bonds. Multi-Asset Funds and Dynamic Asset Allocation Fund: due to their investment strategies, the Funds may buy and sell securities frequently. The use of leverage can amplify the effects of market volatility on the Fund’s share price and may also cause the Fund to liquidate portfolio positions when it would not otherwise be advantageous to do so in order to satisfy its obligations. SEI Investments Management Corporation (SIMC) is the manager of the SEI Private Client Strategies. Performance Disclosure: Strategy returns do not represent actual trading and may not reflect the impact that material economic and market factors might have had on decision-making if SEI Investments Management Corporation (SIMC) were managing client assets. Performance assumes monthly rebalancing of the underlying funds back to their respective assigned allocations which may vary from the actual implementation date and rebalancing process in client accounts. Strategy performance shown is not meant to represent any individual client account. Actual client results may vary substantially. Not FDIC Insured · No Bank Guarantee · May Lose Value
*Performance is of Class F version of Strategies. The performance quoted represents past performance. Past performance does not guarantee future results. Current performance may be higher or lower. The principal value and investment return of an investment will fluctuate so that shares, when redeemed, may be worth more or less than their original value. Please see Performance Information section for important information on this calculation. Strategy expense ratios are as follows: Short-Term (0.41%), Defensive (0.62%), Conservative (0.77%), Moderate (0.95%). Performance assumes investment at the beginning of the period indicated and includes reinvestment of dividends and other earnings. It reflects all recommended SEI reallocations and changes among the funds, including changes in investment managers and funds included in the strategy. Information on allocations among funds, reallocations and strategy changes is available upon request. Strategy performance shown is not meant to represent any individual client account. Strategy performance is net of fees charged by SEI, but does not reflect any fee your advisor may charge which would reduce returns. For example, on an account charged 1% by a financial advisor with a stated annual return (net of mutual fund fees) of 10%, the net total return before taxes would be reduced from 10% to 9%. A 10-year investment of $100,000 at 10% would grow to $259,400, and at 9%, to $236,700 before taxes. S&P 500 Index performance is for illustrative purposes only and not intended to represent the benchmarks for the Strategies.