Quarterly Market Update


Q&A with Anne-Joëlle Viguier-Galley, BBVA Compass’ Chief of Equity and Alternative Investments for the bank’s Global Wealth team. She also doubles as the Chief Investment Strategist for BBVA Wealth Solutions, Inc., the bank’s investment advisor affiliate.

In this edition of the BBVA Compass Market Outlook, Ms. Viguier-Galley discusses volatility.

1. Why is risk so important?

If you lose 50% of your money, you have to make 100% to come back and break-even; it is mathematical. The more money you lose, the harder it is to regain the losses. High volatility results in a portfolio that is more difficult to manage

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2. What is volatility and how is it calculated?

Volatility is a measure of risk. In the simplest sense, stock market volatility (or “vol” in Wall Street jargon) measures fluctuations in stock prices. Standard deviation is a statistical term that measures the amount of variability or dispersion around an average. Standard deviation is also a measure of volatility. Generally speaking, dispersion is the difference between the actual value and the average value. The larger this dispersion or variability is, the higher the standard deviation. The smaller this dispersion or variability is, the lower the standard deviation

3. Volatility warning: It is always there?

The high volatility of stock returns is common knowledge; just look at the Graph below. We purposely graphed all the way back to the 1990s to remind our readers that markets are always volatile, albeit sometimes with long exceptions (like 2017).

The decline in the 2H of 2018 and the accompanying higher volatility reflect concerns about a deterioration in growth when liquidity is becoming more scarce and policy more restrictive after years of QE. Financial conditions have tightened meaningfully, and there is a long list of uncertainties including slowing growth in China and Globally, trade wars, geopolitical tensions, etc.

4. What is equity premium?

Simply put, it is the “extra” return you receive for taking the “extra” risk of stocks vs. a one-month US Treasury Bill, considered risk free. The extra return always comes at a cost, though sometimes you pay in arrears. A study by Fama and French over the period 1963-2016 shows that the monthly equity premium of US common stocks (the Market) was 0.51% (6% annualized); this sounds good, nonetheless, driven by volatility in the Market return, the standard deviation of the monthly equity premium was 4.42%, almost nine times larger! However, most of the evidence about the evolution of premium distributions for longer return horizons is good: i.e. as the return horizon increases, premium distributions become more dispersed, but they move to the right (towards higher values) faster than they become more dispersed. The percentage of negative equity premiums falls from 41.28% for the monthly returns of 1963-2016 to 4.08% for 30-year returns .

5. So, how do you remain invested and “sane”?

  • When you set your level of risk tolerance, think of the worst day in the market that you have experienced and how that makes you feel. Risk tolerance always looks better on good days and amplifies for the worst on bad days! 
  • Think of your portfolio as a basket of companies, not prices and returns. We focus on quality, on franchises with high barriers to entry, free cash flow and dividend growing companies. We emphasize the importance of managing risk to the downside… 
  • …And we also focus on asset allocation. Asset allocation relies on the concept that different asset classes offer returns that are not perfectly correlated (i.e. they don’t move in tandem). Unfortunately, this did not work out too well last year (see the graph), yet…

In 2010, Roger G. Ibbotson and colleagues4 studied 10 years of returns5 for more than 5000 mutual funds in order to measure the relative importance of asset allocation policy vs. active management. Taken together, market return and asset allocation policy return in excess of market return dominate active portfolio management and are collectively the dominant determinant of total return variations. What is the takeaway? It is important to “be” in the market and “doing” a strategic asset allocation that you can live with, even when volatility returns to being what it has always been.

BBVA Compass Global Wealth Investment Management Team

Chief Investment Strategist

Dan Davidson, CFP

Directors of Portfolio Management

Mary Lynn Bronner, CFA
James Engelbrecht

Susan Green

Director of Institutional Trust & Investments

Brad Honer, CFA

Fixed Income Specialists

Eric Green
Thomas Joy

Richard Underwood, CFA

Portfolio Managers

Gary Chontos, CAIA
Peter Connellan
Melissa Diaz

Marc Dobson
Brett Falkenhagen
Antonio Lau

Equity Trader

Valerie Ross


Wilson Boren
Tyler Chapman
Sarah Dolan

Pascal Leduc
Natalie Manning
Allan Ngo

Investment Policy Committee

Dan Davidson, CFP
Mary Lynn Bronner, CFA
Gary Chontos, CAIA
Marc Dobson

James Engelbrecht
Susan Green
Bruce Hagemann
Anne-Joëlle Viguier-Galley, CFA
Marc Wenhammar

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Details you need to make a smart decision

BBVA Compass is the trade name for Compass Bank, Member FDIC, and a member of the BBVA Group. Securities products are NOT deposits, are NOT FDIC insured, are NOT bank guaranteed, may LOSE value and are NOT insured by any federal government agency.

This material contains forward looking statements and projections. There are no guarantees that these results will be achieved.

Investing involves risk including the potential loss of principal. There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in any given market environment. No investment strategy, such as asset allocation, can guarantee a profit or protect against loss in periods of declining values. Past performance is no guarantee of future results. Please note that individual situations can vary. Therefore, the information presented here should only be relied upon when coordinated with individual professional advice.

Indexes are unmanaged and investors are not able to invest directly into any index.

International investing involves special risks not present with U.S. investments due to factors such as increased volatility, currency fluctuation, and differences in auditing and other financial standards. These risks can be accentuated in emerging markets.

Investments in stocks of small companies involve additional risks. Smaller companies typically have a higher risk of failure, and are not as well established as larger blue-chip companies. Historically, smaller-company stocks have experienced a greater degree of market volatility than the overall market average.

 Equity investments tend to be volatile and do not involve the guarantees associated with holding a bond to maturity.

In general, the bond market is volatile as prices rise when interest rates fall and vice versa. This effect is usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.

Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors. The investor should note that vehicles that invest in lower-rated debt securities (commonly referred to as junk bonds) involve additional risks because of the lower credit quality of the securities in the portfolio.

The investor should be aware of the possible higher level of volatility, and increased risk of default.

Municipal bond offerings are subject to availability and change in price. If sold prior to maturity, municipal bonds may be subject to market and interest risk. An issuer may default on payment of the principal or interest of a bond. Bond values will decline as interest rates rise. Depending upon the municipal bond offered, alternative minimum tax and state/local taxes could apply.

The price of commodities is subject to substantial price fluctuations of short periods of time and may be affected by unpredictable international monetary and political policies. The market for commodities is widely unregulated and concentrated investing may lead to higher price volatility.

Investments in real estate have various risks including possible lack of liquidity and devaluation based on adverse economic and regulatory changes.

Other Sources: Bloomberg; California.gov; Russell.com; First page index returns are calculated on a total return basis using the following indexes: S&P 500 (SPX), MSCI World (MXWO), MSCI Emerging Markets (MXEF), BofA Merrill Lynch U.S. Treasuries 1-10 years, BofA Merrill Lynch U.S. Agencies 1-10 years, BofA Merrill Lynch U.S. Corporates 1-10 years A-AAA, BofA Merrill Lynch U.S. Municipals 1-10 years A-AAA, Russell Top 200 Index, Russell 1000 Index, Russell Midcap Index, Russell 2500 Index, Russell 2000 Index, Credit Suisse High Yield Index (CSHY), MSCI U.S. REIT Index (RMZ Index).