Time in Rather than Timing the Market: Defensively Oriented Equities

Insights

Time in Rather than Timing the Market

QS RESEARCH GROUP

FEBRUARY 28, 2019

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2018 tested investors’ resolve. After peaking in September, US equities markets came near bear market territory drawing down 19.8%. During the last quarter of the year, investors fled equity markets amidst the heightened volatility pulling over $75 billion from US Equity Mutual Funds and ETFs in December alone.

NET FUND FLOWS, MONTHLY

NET FUND FLOWS, MONTHLY

Source: Lipper. Includes ETFs, Mutual Funds, Commingled Funds and Fund of Funds.

Investors that left or reduced their equity exposure during the fourth quarter of 2018 missed out of one of the best Januaries on record, as the S&P 500 returned nearly 8%, realizing its biggest January rise since 1987! In fact, the S&P 500 Index, up nearly 12% as of the end of February 2019, has realized the best start to the year since 1991. This swift rebound in returns underscores the difficulty and danger of timing the markets. It is human behavior to react to bouts of volatility with fear; however, history shows this can greatly impact overall total returns. Missing just ten of the best trading days over the last 20 years, would have reduced returns over this period by 64%. Missing 20 of the best trading days over this 20 year holding period would have actually resulted in a negative overall return.

ANNUALIZED RATE OF RETURN S&P 500 INDEX (JAN 1998 – DEC 2018)

ANNUALIZED RATE OF RETURN S&P 500 INDEX (JAN 1998 – DEC 2018)

Source: Bloomberg, S&P 500 Index.

How does understanding the importance of time in the market impact investors today?
As we enter into the latter stages of the economic cycle with anticipated slower economic growth combined with likely increases in volatility, investors need to be mindful of portfolio positioning. Equities continue to be an integral growth component of portfolios, providing the ability to continue to capture supportive economic fundamentals and profits. However, the true benefit of the asset class is only realized when investors are able to stay the course. As such, it is important for investors to consider diversifying equity allocations to high quality and attractively priced defensive large cap equities. Exposure to relatively cheap, non-cyclical dividend paying securities can provide access to equity risk premia and increase diversification while mitigating volatility and downside risk which can leave investors susceptible to selling at the wrong time. Considering the historical upside/downside capture of a fund relative to the market cap weighted index allows investors to set expectations for the overall risk profile and what drawdowns may look like in the midst of volatility.
Investors often fail to appreciate the impact that large drawdowns may have on their investment outcomes. Downside risk is asymmetric and therefore offsetting a large loss requires an even bigger gain. It is important to consider allocating to a fund which allows investors to weather equity market volatility enabling them to maintain market exposure over the long-term. Through reducing volatility and drawdowns, defensively oriented equities may offer a more palatable risk/return profile.

RECOVERING FROM DRAWDOWNS

RECOVERING FROM DRAWDOWNS
This is meant to be an educational illustrative example and not intended to represent investment returns generated by an actual portfolio. These returns do not represent trading or an actual account, but were achieve by means of using the following formula: 1/(1-“market losses”)-1.

This material is intended for informational purposes only and it is not intended that it be relied on to make any investment decision. It was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. It does not constitute investment advice or a recommendation or an offer or solicitation and is not the basis for any contract to purchase or sell any security or other instrument, or QS Investors, LLC to enter into or arrange any type of transaction as a consequence of any information contained herein. QS Investors, LLC does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this document. Except insofar as liability under any statute cannot be excluded, no member of QS Investors, LLC, the Issuer or any officer, employee or associate of them accepts any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage whether direct, indirect, consequential or otherwise suffered by the recipient of this document or any other person.

The views expressed in this document constitute QS Investors’ judgment at the time of issue and are subject to change. The value of shares/units and their derived income may fall as well as rise. Past performance or any prediction or forecast is not indicative of future results. This document is only for professional investors. Investments are subject to risks, including possible loss of principal amount invested.
QSCR-18431 (3/2019)

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