News & Media

The Most contagious Disease is Fear

Jeremy Hutzel | Mar 9, 2020

The most contagious disease is fear, and the market has caught a virus. While the final impact of the coronavirus is yet to be determined, fear has spread throughout global financial markets faster than any biological pandemic could. You will likely hear that this morning a market circuit breaker triggered due to a 7% decline, halting trading for fifteen minutes.

One thing I hear a lot during these times is "let's sit tight until things settle down" or "until things look good again." This makes perfect sense for sailing: if there's a storm raging, wait till it ends before you get in your boat on open water. But it does not work for equity markets. Eleven years ago TODAY, March 9, 2009, was the bottom in the Global Financial Crisis. Why was it the bottom? Simply put, the next day there were more buyers than sellers. And then the day after, and the day after that. And suddenly, within 3 months the S&P 500 was up over 40%. Even with the benefit of hindsight, we can't identify what about March 10th started the turnaround! Years later, I still received calls from potential clients who’d gone to cash and never re-entered the market. Equity markets do not wait on an all-clear signal from the economy, they rally or fall in advance.

The other thing I hear a lot during periods of volatility is "what are we doing about it?" It's natural to feel like you should be doing something – after all, I have CNBC on in my office and they're practically screaming at me to do something. Unsurprisingly, they just can't decide what. It's important to recognize that volatility is not as abnormal as we often think. On average, the market has a 4.5% down DAY twice a year. Of course, these days are clustered in brief periods of intense volatility and not spread out equally every 100 trading days. Similarly clustered around the worst days? The best days. In equities, you don't get one without the other. It's the name of the game – return for taking risk. Therefore, jumping all-in or all-out is a terrible strategy.

We build our client portfolios around a long-term financial plan, and therefore we quantify dry-powder needed. Over the past two years, many of our clients have heard Andy and I talk about the 'bond-tent': using the financial plan to identify two-to-five years' worth of spending needs and intentionally allocate to cash and short term, high quality bonds. Our objective is that in a market downturn our clients will not be forced into fire-sale liquidation of equities due to the 'bond-tent' reserves. (We're happy to revisit any of these conversations on an individual basis!) You've also heard us talk about our barbell approach to portfolio construction during this time period: conservative and low risk investments on one end, and equities on the other end, and avoiding much of what falls in the middle in terms of risk).

I also want to revisit what we have done up to this point, as we've not sat by idly. In addition to building that 'bond tent' and taking a barbell portfolio construction approach, here is a summary of the things we can do, or have done, around the periphery:

  • Many of our client portfolios had a small position in energy infrastructure that was sold in January. Oil is down 47% since the sale.
  • Several client portfolios also had a small position in European real estate that was also sold profitably in January.
  • Proceeds from both sales were rebalanced into the barbell approach. On the heels of a big run in 2019 in the stock market, this often meant buying more short-term high quality bonds.
  • In 2017 we turned off all automatic reinvestment plans of dividends and interest in our client portfolios. With valuations high, we allowed these payments to go into cash and be reallocated through portfolio rebalancing. We can actively rebalance these cash payments into the portfolio allocation and potentially take advantage of lower prices.
  • As I noted in a previous newsletter, we invested in new technology in 2017 that has made it significantly easier for us to take incremental rebalancing action when markets correct and maintain equity exposure.
  • Our client portfolios are market directional, because in the long run we believe this is a key for wealth building, and therefore they suffer in a market decline. But as of this morning, the steps taken above mean we do not have a single client portfolio down as much as the S&P 500 through the trough this current correction.

And for those who still need more to do, here’s what you can do in times like these:

  • Consider increasing your 401k contribution rate, your monthly savings deposit, or starting a new one. Making regular, automatic purchases through times of volatility is one of the most successful long-term investing strategies.
  • Don't read red headlines.
  • I think I am obligated to include the following PSA: Wash your hands regularly and avoid touching your face, eyes, mouth!

All in all, we don't know when and where the market will reach its low. Fear can make markets irrational in the short term. But we do feel very confident that a 15% to 20% discount from prices seen only 3 weeks ago will look attractive in the years to come. Perhaps even more attractive prices are around the corner. It will be an interesting few weeks, likely months, and perhaps even years, as the global economy readjusts to supply chain disruptions and falling demand in hard-hit sectors. But we will be here to help guide you through it.

To healthy habits and safe travels,

Jeremy Hutzel, CFA, CFP®

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