As of market close today, the SPDR S&P 500 ETF SPY is down -5.7% year-to-date. From peak-to-trough, it sits in a -9.73% drawdown.
Perhaps worst of all, 7 of the last 9 trading days have seen returns in excess of 1% in magnitude: -2.05%, -3.12%, -4.08%, -1.22%, +3.97%, +2.30%, -2.84%. All that volatility will give anyone heartburn.
But should it be enough for us to want to be fully defensive? To sell everything and go entirely to cash?
For a broader perspective, we wanted to compare 2015 to the environments of 2008 and 2011.
First we aligned the peaks of each period and draw the return of $1 after 30 trading days.
Can you tell which is 2008, which is 2011, and which is 2015?
But what if we look further down the line?
Let’s consider the first 160 trading days (about 7 months). Can we tell which of these returns is 2011 and which is 2008?
Even knowing that 2011 went on to grow 18% from this point and 2008 went on to sell off another 50%, they are nearly indistinguishable over the first 160 trading days.
So now let’s look at the full picture.
The global financial crisis unfolded over 355 trading days – or about 1.4 years.
And 2008 isn’t the exception. Our research shows us that most large draw downs in equity markets tend to occur over months and years, not weeks.
While we believe in tactical risk management, we do not believe in tactical for tactical’s sake. This means recognizing that while jumping immediately out of the market may feel good when the markets get turbulent, this is precisely the type of emotional response that we are trying to avoid.
While waiting for confirmation of the market’s direction can be stressful, it ensures that we don’t position the portfolio for 2008 when it is really 2011.