YOU MAY THINK YOU CAN’T, BUT YOU CAN
By Kevin Taylor
Volatility is tremendous right now … DUH!! The S&P 500 started the year at 3257 and rose 3.9% to 3386 at the close on February 19
. The index then whipsawed with a drop of 33.9% to close at 2237 on March 23
, followed by a rally of 28.4% to a 2874 closing price on last Friday, April 17
(source Yahoo Finance). The crisis in the oil market caused a negative move again at the beginning of this week but the additional stimulus package announced Tuesday evening has quelled that fall a bit … for now. History has shown the market doesn’t like uncertainty and the current environment is proving this in spades.
Over the past few years, we’ve often noted that politics were dominating economics. Now biology (COVID-19) is overwhelming the other two. It was hard enough to analyze and evaluate factors like employment, inflation, economic growth, and inflation-adjusted wage gains. Tariffs, trade wars, and politics added to the complexity.
It seems like only yesterday that: inflation was low; job growth was high; wage gains were strong; the economy was growing at or near its 2% potential; oil prices were stable, near $50 per barrel; and the S&P 500 regularly hit new all-time highs.
Well, maybe it wasn’t just yesterday, but it wasn’t that far back. Now, whatever you say about the economy is punctuated with question marks. People don’t talk about getting back to “normal,” but rather getting back to the “new normal.” What’s that? Instead of talking about GDP and S&P, we’re confronted with infection and death rates.
Perhaps the most prominent news items have had to do with: (1) unemployment, and (2) fiscal stimulus. Over the past month or so, more than twenty-two million people have lost their jobs or been furloughed and have applied for unemployment insurance. That’s about 15% of the labor force.
In addition to unemployment insurance, the federal government has initiated programs aimed at pumping more than two trillion dollars into the economy. Much of this will go directly to workers and also to small businesses. The Federal Reserve has also been very accommodating with additional trillions in financial aid for the markets. Will these measures work? Will we get back some sense of normal? No one really knows. For now, biology is in charge.
Our most basic instincts in times of crises like these are fight or flight. These hardwired responses are critical for human survival, but they do not serve us well as investors. Encountering a bear in the woods and a bear market elicit a similar response. We are compelled to run in fear for our life, but we must remember that the bear market will not try to eat us. In fact, the primary way a bear market can hurt you is if you run and abandon your plan.
It is natural to want to take action when we face severe challenges, but some of those actions could hurt you, which is why I want to reiterate 5 things that you can and can’t do as we navigate these rough waters. I say reiterate because we have discussed these with our clients multiple times this year alone and we may sound like a broken record. BUT, we have strong convictions in our discipline and with this knowledge, we believe you can find ways to take proactive steps to improve your financial health while avoiding costly missteps.
5 CAN’T AND CAN DO’S:
#1 YOU CAN’T ABANDON THE PLAN BUT YOU CAN STICK TO THE FUNDAMENTALS
A well thought-out plan is designed to weather market swings and volatility. Uncertain times are considered and “baked in” to the projections within the plan. The investments in your portfolio were carefully designed to support your long-term goals and changing course midstream can seriously jeopardize your chances of meeting those goals.
Having the discipline to stick to the fundamentals is what separates true investors from market-timing gamblers. Much like professional athletes, relying on your mastery of the fundamentals can greatly reduce your overall risk and increase your chances of achieving a favorable result.
#2 YOU CAN’T WAIT UNTIL THE DUST SETTLES BUT YOU CAN LOOK TO HISTORICAL EVIDENCE AND DATA
How will ANYONE know when the dust has settled and it’s safe to re-enter the market? By the time you recognize the “right” time and buy back in, the opportunity will have passed you up long ago. Assuming you have enough liquidity, we believe your best bet is to stay invested and remain in position to ride it out.
By harnessing the wisdom of empirical evidence and data, you can let the power of financial markets work for you. A successful investment philosophy is powered by science, not speculation. If you rely on the data and tested academic research, you can sleep better at night during a market downturn.
The truth is that nobody knows what the markets will do this week or this year. No one, including the investment gurus, has a crystal ball. Market forecasts are strictly opinion and shouldn’t drive decisions in tough times.
#3 YOU CAN’T KNOW WHAT THE MARKETS WILL DO BUT YOU CAN CAPITALIZE ON OPPORTUNITIES
While we can’t control the direction of markets, times like this do present good long-term opportunities. Reviewing financial plans and determining practical steps are powerful ways to bolster your strategy. Right now might be a good time to consider tax-loss harvesting, rebalancing, changing asset mixes, adding to your portfolio, and performing Roth IRA conversions, to name a few.
When investing, following your emotions can lead you down the wrong path. Your fear will drive you to sell as the markets fall, and euphoria will compel you to buy stocks at highs. Letting your emotions control your decisions is a recipe for disappointment.
#4 YOU CAN’T LET EMOTIONS DRIVE ACTIONS BUT YOU CAN FOCUS ON HOLISTIC WELLBEING
A core overriding strategy in protecting your wellbeing is: don’t sweat the things you can’t control – like the markets and the coronavirus. Instead, focus your time and energy on the things that matter to you and that you can control – the things that contribute to your general sense of wellbeing and peace of mind. Developing an awareness of and protecting your wellbeing can not only make a big difference in your own life but will also improve the lives of your loved ones and the larger community. During times like this, it includes attending to your overall health, relationships with others, and financial security, engagement with your community, and being purposeful in your daily work.
Stocks have a risk premium for a reason. It compensates investors for the risk they endure while investing. The secret to success is not to avoid risk, but to take intelligent risks that have historically been compensated. Risk and “not knowing” is part of the process.
#5 YOU CAN’T ABANDON THE PLAN BUT YOU CAN REASSESS YOUR PRIORITIES
If you start feeling panicked about the market, revisiting your financial plan may be helpful. Review your plan and evaluate how much has changed. Is now a good time to review or update some of your goals? In a well-thought-out plan, it is often the case that the current environment has less impact than you might think.
As always, if you would like to discuss what you can and can’t do to make your overall plan more sound, please give us a call.