Posts made in March 2020

Four Things Others Will Wish They Had Done – That We’re Already Do

As you know, the coronavirus situation continues to hammer the markets.  All over the world, investors large and small are facing a level of uncertainty we haven’t experienced in over a decade.  But I’m proud to say that, based on the conversations I’ve had with you and my other clients, there may be no group of people in the world who are handling this situation better.  The majority of my clients have all told me some variation of the same thing:

“It’s not fun, but I’m not stressing about it too much.  I know the markets will recover eventually.”

In other words, they know that, while what goes up must come down, what goes down will eventually bounce back up.

I was also proud when a client asked me a very simple, but very smart question the other day:

“When this is all over, what will I wish I had done?”

This question really got me thinking.  Investors are bombarded every day with opinions (informed or otherwise), data (informative or misleading), and news (real or fake).  As a result, many investors have panicked.  When the coronavirus pandemic resolves and the markets rebound, what will they wish they had done?

Here are my answers:

1. They’ll wish they had focused on the long-term instead of the short.

Investing, by its very nature, is a long-term activity.  Even people who are close to retirement are still investing for the long-term.  That’s why, while bear markets are uncomfortable, they’re also somewhat overrated.  Markets fall over days, weeks, and sometimes, months.  But history has shown that they rise over the course of years and decades, which is good for us, because we’ll be investing for years to come!

Investors who forget this, who think that what’s happening now will happen always, are falling prey to recency bias.  And that never ends well.

2. They’ll wish they had double-checked our asset allocation before all this started.

Asset allocation – the process of spreading your investments across different asset classes – is one of the most important things an investor can do to balance risk versus reward.  During bear markets, the investors who get burned the most are the ones who “put all their eggs in one basket.”  That’s because they didn’t stop to think what would happen if they let their basket drop.       

Investors who have spread their money across a variety of asset classes – who have truly diversified – know they have plenty of eggs left to cook with.

3. They’ll wish they hadn’t tried to take shortcuts.

Think of the last time you were caught in a traffic jam.  You’re sitting there, idling in traffic, when suddenly, the lane next to you starts to move.  So, you quickly merge into that lane, only to get stuck again.  Meanwhile, the lane you were just in is now moving…and all the cars that were once behind you are now speeding ahead.

Maddening, isn’t it?

When bear markets hit, investors often panic.  Instead of sticking to their long-term strategy, they sell, sell, sell – at a time when everyone is selling.  This means they are selling low.  In other words, they try to change lanes in the middle of a traffic jam.

But again, we’re in this for the long-term.  The road we’re on stretches for miles.  Sometimes, the speed limit is 75 miles per hour.  Sometimes, it’s only 25.  Trying to take shortcuts just leads to longer delays.

4. They’ll wish they had positioned themselves to take advantage of when the markets rebound.

It happened after the Great Depression.  It happened after the stock market crash of ’87. It happened after the dot-com bubble burst.  It happened after the financial crisis of 2008.  It happened after the fourth quarter of 2018.  The markets recovered – and climbed to new heights.

Just as bear markets are inevitable, so too are bull markets.  Investors who don’t think long-term, who try to take shortcuts, who don’t try to balance risk and reward, will not be positioned to take advantage of the next one.  Which means that when this is all over and the markets rebound, when they look over at the lane next to them and see people zooming ahead, they’ll be wishing they had done things differently.

But here’s the good news. When this is all over, we won’t be wishing we had done these things.  Why?  Because we’re already doing them!  So, while headlines probably won’t be pleasant over the next several weeks, we can take comfort in this very simple fact:

When this is all over, we won’t need to look back and regret.  All we’ll need to do is keep looking forward.

No matter what headlines you see over the coming weeks and months, always remember that my team and I are here for you.  We’re here to answer your questions.  We’re here to keep an eye on your money.  We’re here to help you hold to your long-term dreams and plans.  So, if there’s ever anything more we can do, please don’t hesitate to let us know.

Because we’re here.

The Situation

On Thursday, March 5, 2020, the Dow fell 969 points – just the latest in a week of wild swings.¹  While monitoring the situation, a headline caught my eye:

“Dow tumbles nearly 1,000 points again, because stocks can’t figure out coronavirus.”² 

To me, this headline illustrates what the media often gets wrong about investing.  But before we dive into that, let’s review how the coronavirus (COVID-19) is impacting the markets.

A wild week

In terms of pure numbers, the first week of March has been one of the wildest in recent memory.  In fact, the Dow had two of its best days ever on March 2^nd and 4^th…but two of its worst days ever on March 3^rd and 5^th. ²  Writers have been comparing the stock market to a rollercoaster for decades, but this takes the analogy to a whole new level.

It's not hard to understand why.  The coronavirus outbreak – which as of this writing has spread to over 100,000 people, with over 3,400 fatalities – is putting a major crimp on business activities around the world.³  Global supply chains, which are the networks between a company and its suppliers, have been dramatically affected. As a result, some of the world’s largest corporations have warned shareholders that they may not be able to reach their quarterly profit estimates.  Industries like travel and transportation, which depend on the movement of people and goods, have seen business plummet.  This in turn has impacted the energy industry, as less travel and transportation mean less demand for oil.

So.  Coronavirus is definitely taking a toll on global markets.  The question economists are struggling to answer is, “How will coronavirus affect the global economy?” 

Here in the United States, consumer spending is one of the main drivers of our economy.  There have been over two-hundred confirmed cases of COVID-19 thus far.  That’s a small number in the grand scheme of things.  Economists’ concern, though, is that the virus may spread, causing people to stay home and consumer spending to slow dramatically.  Nations with far more cases, like China, South Korea, and Italy, are already seeing slowdowns.  The worst-case scenario, according to some analysts, is that economic growth for 2020 could be cut in half if the virus continues to spread.⁴  Should that happen, some nations may well experience a recession.

The Federal Reserve responds

For weeks, analysts expected the Federal Reserve would act at some point.  That’s exactly what they did on Tuesday, March 3^rd, when the Fed announced they would cut interest rates by 0.5%.⁵  The Fed figured lower interest rates would prompt more spending and lending.  Think of it as giving the economy a dose of Vitamin C.

But the markets fell anyway.

There are a few reasons for this.  While a rate cut was expected, the Fed acted much sooner than many anticipated.  So, rather than prompt enthusiasm, it instead prompted concern.  “If the Fed feels like they have to cut rates to keep the economy going,” the thinking goes, “what does that say about the economy?”

Then, too, there’s only so much that lower interest rates can actually do.  To be frank, the Fed has already spent most of its ammunition on this front.  Interest rates have been low for years and have only gotten lower lately.  Furthermore, interest rates can’t fix global supply chains, or replace lost business.  They won’t fill seats on airlines or keep the machinery running in hard-hit factories.  Nor can they stop coronavirus from spreading.

Viruses are no respecter of borders or laws; they’re certainly no respecter of lower interest rates.

Headline-driven investing

Just typing those words makes me shudder!  Headlines are one of the last things that should drive investing, but that’s where we are right now.  The proof is in what happened on Wednesday, March 4^th.

The night before was Super Tuesday – when fourteen states held presidential primaries.  Joe Biden won most of these states, which buoyed investors, as Biden is seen as more centrist than his main opponent, Bernie Sanders.

What connection does Joe Biden winning have on stocks?  None right now.  It doesn’t change anything about coronavirus.  It won’t magically increase economic activity.  The election itself isn’t for another eight months!  And yet, the markets rose over 1,000 points on the back of that headline…before giving most of it back the very next day when the headlines changed.⁶

Which leads me back to the headline I showed you at the beginning of this letter.

“Dow tumbles nearly 1,000 points again, because stocks can’t figure out coronavirus.” 

Look at those words again: Stocks can’t figure out coronavirus.  Stocks don’t have minds of their own, of course, so my guess is the headline really meant investors can’t figure out coronavirus.

But here’s the thing.  For investors, there’s not much to figure out.

Economists, analysts, and pundits try to divine how today’s news will affect tomorrow.  They create projections to help banks, businesses, and politicians make decisions.  It’s a hard job, there’s no denying.

But no investor can accurately predict how bad the virus will or won’t be.  I’ve seen some commentators make claims about vaccines, or how warm weather will stop the virus in its tracks, or any of a dozen other things.  It’s all speculation.  The fact is, no one knows how long this epidemic will last, or how far it will spread.  No one knows who will win the election in November.  No one knows the future!  We can make educated guesses, but we can’t know with any certainty.  So of course investors can’t “figure out” coronavirus.

Even if we could, the situation would likely change the next day!

To me, the problem with the headline above is that it implies investors should be trying to “figure it out.”  But if we could, there would never be any uncertainty.  Investing would become as predictable as grocery shopping.  But investing doesn’t work like that.  That’s why we don’t make investment decisions based on predictions.  It’s why, during times of market volatility, we don’t chase our own tail, trying to time the markets or make risky bets based on what we guess might happen.

In other words, we don’t need to “figure out” coronavirus.  Let’s leave that to the scientists.  Instead, all we need to do is largely what we’ve already done!  And that is:

1. Determine what kind of investment return you need to reach your goals, and then choose high-quality investments based on the principles of supply and demand. When demand outpaces supply, buyers are in control, and prices are likely to move upward.  When supply is greater than demand, sellers are in control, and prices tend to go down.  That’s why we don’t buy or sell based on predictions or stories.  We look at what is actually happening by examining trends.
2. When the market is trending upward, we focus on growing your money. When the market trends down, we focus on preserving it.  This is done by putting strict rules in place that govern your investments.  For example, if an investment moves below a predetermined exit point, we sell.  If necessary, we can move entirely to cash if that’s what it takes to preserve your principal.

In the short term, coronavirus will probably continue to impact the markets.  The global economy will continue having symptoms.  But we don’t need to guess what the effects will be anymore than we need to guess what the weather will be like ninety days from now.  Instead, we determine the rules we need to follow to help you reach your goals, and then follow those rules to the letter.  To me, it’s comforting to know that we don’t need a crystal ball to be successful long-term investors.  We don’t need to be virus experts.  All we need to be is disciplined, informed, and prudent.

In the meantime, I expect volatility will continue.  By the time you read these words, the headlines will have changed again.  That means the markets will have probably swung again.  That’s okay.  Because while volatility is never fun, we don’t need to “figure it out.”  We’ve already done that.

While I’m encouraging you to not stress over daily headlines or market swings, I understand that’s sometimes easier said than done.  After all, it’s your money!  So, if you have any questions or concerns about your portfolio, please let me know. I will always be here for you.