Crisis Volatility Peaks, the VIX and Market Crashes
Volatility Index – 20 Year Activity (Source: Mactrotrends March 31, 2020)

THE VIRAL ECONOMY

The viral economy does not behave normally compared to typical recessions or downturns. Black swan events, especially ones affecting every nation globally, create unprecedented challenges requiring new solutions. The ability to remain flexible in thought can successfully get you through the event.

First and foremost, Scherschel Wealth hopes everyone follows the social distancing guidelines. Please remain in safe conditions during this upheaval to our regular lives. Second, to address the March black swan market dive, we offer our assessment and several solutions.

Correlations

As with the 2008-2009 market crash, investors once again witnessed downward correlation between all asset classes. Modern Portfolio Theory (MPT) and 60/40  portfolio balances of the past proved that they remain outdated models to adequately prepare investors. Again, this led to major shocks in investors portfolios and nascent retirement security. Those who don’t learn from history are bound to repeat it. MPT remained the prevailing investment theory for the past fifty years because it easily diversifies assets according to class. Many believed this could reduce overall risk exposure. Yet, when all assets go down at the same time, the diversification of MPT becomes meaningless. This leaves the investor with a long lead time to full recovery. What other options does an investor have? To name a few, here are some alternative investing strategies or theories:

  1. Trend Aggregation
  2. Adaptive Optimization
  3. Underwater Correlation

While we will not address the complex technical aspects of these approaches in our newsletter, we will say that they present innovative alternatives to the worn out theories of the past.

Volatility Peaks

The chart above displays the relative peaks in volatility through the ’90, ’01, ’08-’09 recessions and market activity as of this newsletter date. Volatility levels have already begun their descent but still have several months to go before reaching normalized levels. Responding to negative market activity of the past month, it is critical to look six to nine months ahead and prepare allocations for the end of the year and into 2021.

Emotion Based Investing

One of the most critical actions for any investor to understand involves coming to a self-realization of whether or not you make emotionally charged decisions. For those who impulsively reacted to the daily news of the past four weeks, the damage may have already been done to long-term financial security if they sold at the wrong times. Understanding one’s own emotional response to panics and market shocks remains critical at this time. Volatility will continue to stick around for the foreseeable future. It is vitally important at this time to develop a well thought plan of action to address the continued stream of bad news for the next several months coming from the media. The road ahead is a bumpy road back to normalcy from the depths of this pandemic. Scherschel Wealth is here to help guide you through it.

Economic carnage from the pandemic will make waves throughout the economy for at least the coming two quarters as life tries to normalize. However, this too shall pass and economic activity will eventually rebound, but not without major changes to our economy and societal behavior patterns. If you found yourself unprepared for this type of event, Scherschel Wealth extends our free assessment to you for the purpose of introducing new approaches to either (1) get your retirement back on track or (2) define a new strategy to help you prepare for future long-term market shocks as severe as what we currently navigate.

If you seek financial advice or are uncertain about your investment portfolio, Scherschel Wealth would be pleased to offer you a complimentary analysis. Please contact Louis Scherschel to discuss further.

LinkedIn 2020 1st Quarter Investor Newsletter – The Viral Economy

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