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March 12, 2020: Is This Time Different?

  “Neither ‘get in’ nor ‘get out’ are investment strategies…they represent gambling on moments in time; when investing should ALWAYS be a process over time.”

-Liz Ann Sonders, Schwab Chief Investment Strategist

We are experiencing a frightening drop in stock prices.  For the first time in 11 years, the Dow has entered bear market territory, defined as a drop of 20% or more.  The S&P 500 will likely follow the Dow into bear market territory today.

Stunningly, it took only 19 trading days for the Dow to go from a record high, set on February 12, to a bear market.  According to this morning’s Wall Street Journal, this was the Dow’s fastest move from a peak to a bear market on record, compared to an average peak-to-bear market span of 136 days.

Is This Time Different?

Although our reactions to crises may be different now due to social media and 24-hour opinion-based television, the rules of investing have not changed.  It seems quaint to boil down investing to the mantra “buy low, sell high,” but that’s really what it’s all about, isn’t it?

We manage portfolios based upon targeted allocations to stocks and bonds.  When stock allocations rise above our targets, we sell a portion of them and reinvest the proceeds into bonds.  When stock prices drop, causing stock allocations to fall below our targets, we buy more of them.  This approach removes emotion from the process when it can do the most damage; i.e., during times of panic or euphoria.

Our younger clients with no need to draw from their portfolios have more allocated to stocks, while our clients with near-term cash flow needs have less money allocated to stocks and more allocated to stable investments.  Entering a stock market panic with an appropriate asset allocation means we will not be forced to sell stocks at bear market prices to meet cash flow needs.

We wish we could avoid risk and earn an acceptable return on safe investments, but we are investing in a prolonged period of 1-2% interest rates and, in the case of savings accounts, CDs, and money markets, rates appear to be headed even lower.  For this reason, we believe nearly every investor must embrace some level of stock market risk.

Looking Ahead

Given recent precautions taken to prevent the spread of coronavirus, it seems certain that the global economy will endure a significant hit in the near-term.  Whether this leads to a recession remains to be seen.  Importantly, we do NOT believe this is a repeat of the Global Financial Crisis of 2008-2009.

As to the stock market, for most of the past several years we have been net sellers of stocks as they rose in price and drove our stock allocations above our targets.  In recent weeks, we have been buyers of stocks as their prices have dropped sharply.  We do not expect a quick payoff from recent weeks’ purchases but believe they will prove to be profitable within your time horizon.

Unfortunately, we must forewarn you that your first quarter results will almost certainly be ugly.  Importantly, however, we believe this quarter’s losses are temporary in nature and we do not intend to lock them in by selling stocks at these prices.  If you wish to discuss your finances in greater detail with us, please contact us to schedule a meeting or telephone call.  Thank you for your patience during this crisis.

 

Sonders, Liz Ann. "Manic Monday (Tuesday, Wednesday, Thursday, Friday)." Charles Schwab MARKET VOLATILITY, March 9, 2020. Web. 12 Mar. 2020.   

Otani, Akane and Karen Langley. "Dow's 11-Year Bull Market Ends." The Wall Street Journal, March 12, 2020. 

"Dow Jones Industrial Average since the start of the past bull market." The Wall Street Journal. Web. 12 Mar. 2020.

Past performance does not guarantee future results.  Investment strategies discussed may not be suitable for all investors.  Diversification does not guarantee against investment loss.  The information provided here is for general informational purposes only.  The inclusion of specific securities within the context of broad economic commentary is not intended to be a recommendation.  Investors should thoroughly evaluate any security before taking action.  International investments involve special risks, including currency fluctuations and political and economic instability.  Opinions expressed are subject to change without notice in reaction to shifting market conditions.  Data contained herein is obtained from what are considered reliable sources.  However, its accuracy, completeness or reliability cannot be guaranteed.

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