“Markets fluctuate.” That was the entire comment by Ace Greenberg, the CEO of Bear Stearns, in a special issue of Institutional Investor magazine dedicated to opinions from the great and the good regarding the causes and consequences of October 1987’s 508 point/-23% market crash. Others said more. Much more. None of it is memorable. I suspect that (almost) all of it was wrong. We don’t know in the moment what is causing markets to move, despite what they say on CNBC. Nor can we foresee the ramifications of large and volatile market movements. Sometimes, as in 2008, they are profound. Other times, like in 1987, they are speed bumps, nothing more. Ace understood that.
We don’t yet know if we are experiencing fundamental changes in the markets or the economy. We do know that markets are likely to stay volatile for a time. Volatility has a tendency to stay high once it spikes.
Given that our understanding of volatile market events is limited in real-time, I have found that making sudden changes in investments or asset allocations is not helpful. What has worked best for me through episodes like this, over many cycles, has been to assess the landscape and, if I can discern a change in the market environment, to look for opportunities.
The other thing that I have seen work well is rebalancing back to a target portfolio. If a downturn becomes deep, you want to be exposed to equities for the rebound. It’s an easy thing to say and a difficult thing to do. Historically, it has been the correct move.