Coronavirus Analysis and Recommendations
Updated: Apr 19
As the Coronavirus situation continues to worsen, we have officially entered into a bear market. With volatility at an all time high, what steps should you take to better protect your finances during this turbulent time?
“We are confident that with close monitoring and some possible “tweaking” along the way, we can weather this storm in the short-term to achieve your goals in the longer-term.”
Examination and Advice for the COVID-19 markets
Given the rapidly changing nature of the market and economic events tied to the Coronavirus, we wanted to keep you apprised of our viewpoints and investment tactics. We make two quick opening remarks: 1) The impending economic slowdown is a by-product of the prudent, global medical response to contain or slow the spread of the virus. 2) Prior to the onset of the virus, policies were in place that were fostering a slow, but steady global economic recovery. This suggests to us that there is a good case to be made that the currently deteriorating economic picture can reverse course and take stocks back with it once it appears the virus problem is peaking out and we move away from a world mired in containment mode. This is a very different situation when looking back at, say, the 2008/2009 period where there was a deep, systemic breakdown among irresponsible lending, banking, and securitization policies which led to a housing bubble and global credit crunch.
We do understand however, that whether we’re on or off target with our assessments it doesn’t matter so much as what our investors today are feeling as they watch global stock markets move into bear market territory. With this in mind, we share the following comments and recommendations to get you through this challenging period:
Treat the stock market like an old friend
This friend, however, has annoying habits and idiosyncrasies which irritate you along the way, but over the years you’ve learned to press through those moments in order to reap the many benefits you’ve enjoyed from this relationship. So it is with stocks. Successful investors who have committed to the long-term wealth accumulation capability of stocks have also resigned themselves to accepting some of the annoying moments they present along the way...such as the situation we find ourselves in today.
This does not mean you give volatility a hug and a smile but, as alluded to above, accept the reality that – like life- markets have their good and bad times. This comes along with any long-term investing process. For the opportunistic investor, volatility can become one’s friend, not foe, as it creates opportunities to buy stuff when it’s on sale...a notion fully embraced by Wal-Mart’s bargain hunters, yet frequently ignored by Wall Street’s investors. Part of the discipline of “rebalancing” - which we adhere to at ISG- means adding to underperforming asset classes when the urge is to do otherwise. ISG’s investment committee is presently in discussions with regard to this tactic.
Resist the temptation to have your cake and eat it too
Turning a relationship on and off is a difficult proposition. Likewise, it’s difficult to turn your stock market relationship on and off without accepting the trade-off of potentially inferior results over longer time frames. Big up moves in stocks can be sporadic, unpredictable, and often irrational. The penalty for missing out on them can be severe. For example, missing out on the market’s 10 best days over the last 20 years has dramatic effects on an initial $100,000 investment, as the chart below depicts:
Become a Historian
History doesn’t always repeat itself...but it often rhymes with similar up and down patterns of behavior. When it’s heading down like it has been recently, bargain-hunters will eventually take hold, which creates support and sets the stage for a new recovery. Take some solace in knowing that since 1926 average bear market losses were a cumulative -38% while average gains from bull markets were +339%. Intra-year declines are also normal. After the financial crisis in 2009 the market was -28% at one point before rebounding to finish the year well over +20%. And while it could be different this time, know that global equity markets have generally powered through past viral outbreaks. Please refer to the chart below for a visual representation of these ups and downs:
Make rational, not emotional decisions
Given the high levels of volatility today, avoid making major changes based on emotional impulses. If you’re in panic mode, VISIT WITH YOUR ADVISOR to review your long-term plan which includes your allocation to stocks, bonds, etc. As we indicated in our first communication, our portfolio designs have been somewhat pre-emptive for these volatile times. We are confident that with close monitoring and some possible “tweaking” along the way, we can weather this storm in the short-term to achieve your goals in the longer-term.
To close, we live in interesting times as the coronavirus has transformed our conversations and is now impacting our daily life routines. Our hearts go out to the human toll of this terrible event and we encourage all of you to resist “group-think,” behave sensibly with regard to common sense hygiene, and please, please, look after the more susceptible elderly population we so dearly love.