The last few weeks have produced record volatility in the investment marketplace. It seems one day the Dow Jones Industrial Average is down 2,000 points, the next day it is up 1,000. Bond prices continue to climb, with the benchmark 10 Year Treasury hitting its highest price in history, before dipping slightly from that high. Commodity prices have slumped with an expected slowdown in consumer spending, as a result of the COVID-19 virus.
Investors are rightfully concerned. There is no telling when the disease will be brought under control, nor what long-term economic impact will be on the economy. The stock market normally reacts poorly to the unknown, and the future is certainly unknown.
The advisors of Personal Wealth Strategies have nearly 150 years of experience advising clients on financial planning and investment management. We have spent the last few weeks studying market research, speaking to investors, and collaborating with each other to provide our clients top-in-class advice. Below we share with you some of our insights.
This time is different Most market downturns are caused by economic conditions. Whether it is a change in inflation, movement in interest rates, or the report of issues in the housing market, the stock market usually responses in anticipation of a change in economic conditions. This time the cause is driven by a biological concern, and with it a very uncertain future.
On top of the lack of clarity toward the future is a change in the market participants. Twelve years ago, in the height of the financial crisis, information flowed at a slower pace. Today, computer algorithms place trades timed in milliseconds. This high frequency trading results in billions of trades placed every day. Individual investors glued to their TVs and computer screens try to process this overwhelming amount of information and worry when the markets trend down. When retail investors are bombarded with pessimistic messages, they tend to sell their positions.
This time is not different During our careers we have seen other events that were shocks to the investment markets; at the time some were just as scary as today’s pandemic. We were there for Black Monday in 1987 (a single day decline of 22% in the market), the junk bond meltdown in 1989, Y2K, the Tech Wreck dot com bust of 2001, the terrorist attacks on 9/11, the Great Recession in 2008, the Greek sovereign debt crisis in 2009 and most recently Brexit starting in 2016. The common theme—for a short time everything looks desperate. Doom and gloom fill the airwaves. But what happened every single time? The world stabilizes, markets hit a bottom, and begin to move up. At first the rise is usually very rapid, making it dangerous to get out of the market on the way down, and then becomes more gradual until the markets hit a new all-time high. Of course, here we have to say that past performance is not a guarantee of future results and there is no assurance the future will look like the past. Nonetheless, the past teaches us that getting out of the market can be as risky as staying in.
Fundamentals Matter The allocation of your investment portfolio will be a large determinate in the return of your account. The percentage of your total account that you invest in stocks, bonds, real estate, cash, commodities, etc. will shape the performance of your account. While it is possible to pick a hot stock or jump into or out of the market at just the right time, the fundamental of allocating your portfolio based on your time horizon and risk tolerance is critical. When a football team is struggling, they focus on blocking and tackling. When a musician’s performance is lagging, she practices her scales. When your investment account seems vulnerable, ignore the free internet advice and loud talking heads, and go back to the fundamentals.
The Single Greatest Investment Strategy is to Buy When Things are Low and Sell When They are High Easy to say, hard to do. Before the stock market fell our gut told us it was safe to buy stocks at record high prices. When the stock market tumbled our gut told us to get out. When investing listen to your head not your gut.
Risk Should be Your Primary Focus When Investing For years you have been hearing from low-cost providers that fees matter. Even the government has jumped in requiring your retirement plan at work to annually send out a special report listing all the fees assessed to your account. And while fees are important (who wouldn’t want to pay less for the same thing?), investors should be focusing more time on measuring risk in their portfolio. Every week we see potential clients come into our offices with low cost investment accounts with risk levels not consistent with their goals. In today’s volatile market they are learning a very expensive lesson—measure risk first and only then look to minimize fees.
Experience Matters The advisors of Personal Wealth Strategies have been there before. Through the years we have worked with hundreds of clients in good markets and bad stay focused on achieving their goals. The price of the stocks only matters on 2 days—the day you buy and the day you sell. If today is not one of those days, watch the speculators get rich (or take a bath), and realize they are playing in a different arena than you. Only if you believe the markets will not recover by the time you want to sell should you be concerned.
We are here to help guide you through these tumultuous times. If you are in doubt lean on us. That’s why you hired us. And know when the stock market hits the bottom of this bear market, as it inevitably will, and begins the next bull market, whenever that is, we will be here for you. In good times and in bad.