Minimum volatility strategies are one way to seek more equity stability, which may help investors stay in the markets over the long run.
Severe volatility tests even the most disciplined investors. The longest-ever bull market for U.S. stocks came to a halt this year as COVID-19 worries gripped financial markets around the globe. Stock volatility surged, the S&P 500 plunged more than 30% and equities have been sold indiscriminately regardless of their region or sector.
Many are left with questions swirling about money saved for retirement, a new home or a grandchild’s college education. It’s only human to experience the pain of losses more severely than the joys of gains. In behavioral finance, this concept is known as “loss aversion.” Faced with stiff declines, it’s easy to consider retreating from risky assets such as stocks and moving toward havens such as cash. But this approach comes with a potential cost as well: History shows that investors who try to time the market frequently exit stocks after a large loss, only to miss the potential rebound.
While market swings can be tough to swallow, we believe investors have a better chance to achieve financial goals if they stick to a long-term plan. From a behavioral perspective, lower volatility is easier for most investors to stomach – and stay in the market. Minimum volatility strategies such as the iShares Edge MSCI Min Vol USA ETF (USMV) have also delivered market-like returns over time, even with a focus on risk reduction (see below).
It’s all about the math of loss.