For those who followed the Financial Crisis of 2008/2009, we all remember how there was no place to hide (except U.S. Treasuries). All asset classes struggled with steep losses and their correlations with each other all approached 1.0; a situation where diversification did not help portfolio performance. A well-built portfolio will have some asset classes with low correlation and some with negative correlation to help weather volatility of returns. The environment today has shown similar characteristics with most all asset classes “selling off”.
Per the table below, you can see the year-to-date negative drawdowns of the S&P 500 and investment grade bonds that are usually negatively correlated; the S&P 500 (IVV) is down -14.78% and investment grade bonds (LQD) are down -2.71%. The only safe havens with YTD positive returns are short treasury bonds and aggregate core bonds (that is made up mostly with U.S. Treasuries). Other diversifying positions like in U.S. factor exposures (i.e., minimum vol, momentum), international markets, real estate, and bank loans have all suffered steep losses.
Just like the Financial Crisis, I expect this situation to rectify itself over time. Like I said in my previous post, I have done some selective tax loss selling and de-risking in some portfolios that cannot tolerate steep losses due to a shorter time horizon than 5 years. For accounts with a time horizon greater than 5 years, I expect to “sit tight”, but I will continue to look for selective opportunities to potentially rebalance into other opportunities to improve performance going forward.