When Markets Are Recovering, Don't Ignore Volatility

Global stocks rebounded sharply from the coronavirus market crash in 2020, but the ride was rocky. Even in a rising market, volatility is a clear and present danger. With so many risks clouding the outlook, we believe that investors should focus on generating a smoother pattern of returns through the recovery from COVID-19.

When equity markets tumbled in early 2020, controlling volatility was a high priority for many investors. But as markets recovered through the last nine months of the year, volatility might have seemed less pressing.

In fact, volatility persisted through 2020, even as stocks recovered. The daily volatility of the MSCI ACWI Index was 28%—nearly three times higher than in 2019. The index rose or fell by at least 1% in 90 days during 2020—more than three times as frequently as in 2019. 

Stay Invested Through Volatile Episodes

Big drawdowns can be unsettling for investors. But selling out of equities when the market corrects is often a mistake. Indeed, investors who exited stocks during the COVID-19 crash during February and March of 2020 would have locked in losses and missed the rebound through the rest of the year. Since it’s almost impossible to time inflection points in the market, we believe staying invested through bouts of volatility is essential for success.

Even after recovering most of the losses from the first quarter 2020 sell-off, news of vaccine breakthroughs has pushed equity markets higher since November. Yet the world’s exit path from the pandemic is still highly uncertain. Restoring global economic growth will be an uneven process that will depend on fiscal policies, public health concerns and consumer confidence. These are just some of the risks that may continue to fuel volatility this year. In this environment, we think it’s important to consider investment strategies that can help investors capture good sources of long-term return potential but that are also designed to help reduce risk in falling markets and deliver a more comfortable investment journey.