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Another Coronavirus Post (email)

March 10, 2020
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In the past few weeks, I’ve done a few “double takes” at my computer or my phone, as we’ve watched major swings in stock prices and movements in the bond and crude oil markets. And on top of the financial ramifications, we're also concerned about people and health and society. 

It's scary... It's scary for me, it's scary for you, and it's scary for the people we know and care about. 

I know you heard from me yesterday and I don't usually communicate this frequently, but special circumstances call for special communications. 

But before I dive into this email, let me point out a universal truth to what I believe is the best way to manage money. 

My advice during times like this will feel unsatisfactory.

...It just will.

The reason? 

There is nothing we want right now more than CERTAINTY.

Unfortunately, it doesn't exist. 

(..but believe me, the hyenas are in their cave somewhere just ramping up to market their "magic thing that provides certainty" to the people who've experienced this decline. Buyers beware!)

Even as someone who's armed with all of the data about market declines and corrections and how normal they are, I too will get spooked if I watch too much news or read too many articles in the mainstream media.

I ignore a lot of it to keep my sensibilities intact because my job is to provide some messaging to offset at least a tiny portion of the fear you may be feeling. 

Speaking of fear...Here's a quick recap of yesterday: 

Clearly we witnessed an extraordinary move in the financial markets yesterday (Monday, March 9).

The Dow Industrials lost over 2,000 points, as Coronavirus fears continued to worry investors. At the same time, oil prices lost nearly 25 percent, on news that Saudi Arabia was dropping crude oil prices and raising production as well. Meanwhile, the 10-year Treasury bond yield touched an all-time low of 0.318 percent during the trading session, as unnerved investors looked for some stability.1

It's remarkable to consider that the 10-year US Treasury Bond is paying 0.318% while the Federal Reserve has an inflation target of 2%. This highlights a flight to safety at all costs... One which I don't believe is merited for long term investors. 

Even further the S&P 500 Index (represented by SPDR S&P 500 ETF) is paying about a 1.9% dividend yield while maintaining the potential upside return (and downside risk too, I suppose). 

If you have 10 years to invest --considering the potential for 2% inflation-- which would you prefer? 0.318% yield to buy a "safe US Treasury bond" or 1.9% yield in  "volatile US Stocks"? 

**Past performance not indicative of future returns. Not a recommendation, just trying to highlight a point ;) 

For me, a quick look at recent history helps keep these events in perspective.

Remember when the trade dispute with China ramped up back in February 2018? In just six trading days, stock prices had undergone a rollercoaster ride on their way to a 10-percent market correction. On February 8, 2018, CNBC reported that the Dow Industrials traveled 22,000-plus points over the course of February’s first full week of trading, due to trade-related fears.2

How about the 4th quarter of 2018? On October 10 of that year, the Dow saw an 800-point drop, largely due to rising interest rates and global economic concerns. And who can forget the holiday market trading two months later? It was a breathtaking event as the Dow lost over 600 points on Christmas Eve, then soared 1,000 points the day after Christmas.3,4  

This highlights how we just kinda need to bury our heads in the sand at least a little bit when the news continues to stockpile against us, just hoping for a reaction. 

Reacting Affects Performance

If one were to try to time the market in order to avoid the potential losses associated with periods of increased volatility, would this help or hinder long-term performance? You guessed it... reacting is bad for performance in most cases.

We know it's unlikely that investors can successfully time the market. Still, some do and they do it successfully, but it almost never occurs consistently and it may be a result of luck rather than skill.

Further complicating the prospect of market timing being additive to portfolio performance is the fact that a substantial proportion of the total return of stocks over long periods comes from just a handful of days. Since investors are unlikely to be able to identify in advance which days will have strong returns and which will not, the prudent course is likely to remain invested during periods of volatility rather than jump into and out of stocks. Otherwise, an investor runs the risk of being on the sidelines on days when returns happen to be strongly positive.

The chart below highlights the impact of missing the best days: 

The chart above shows the annualized compound return of the S&P 500 Index going back to 1990 and illustrates the impact of missing out on just a few days of strong returns.

The bars represent the hypothetical growth of $1,000 over the period and show what happened if you missed the best single day during the period and what happened if you missed a handful of the best single days. The data shows that being on the sidelines for only a few of the best single days in the market would have resulted in substantially lower returns than the total period had to offer.

Now let's look at 1, 3, and 5 year periods following declines...

A broad market index tracking data since 1926 in the US shows that stocks have generally delivered strong returns over one-year, three-year, and five-year periods following steep declines.

Fama/French Total US Market Research Index Returns

July 1926-December 2019

The charts above probably didn't tell you anything you didn't already know, but I had to deliver them nonetheless because it's the only approach that makes any sense.... Which brings me to the final purpose of this email:

I think advisors are crucially important during times like these, but we can also come off a bit 'emotionally insensitive'... I try hard to honor the emotion of markets like this, but sticking to a data-driven plan in the midst of chaos tends to sounds a bit mechanical. If you've been working with me then you know my firm's principles and I know I'm preaching to the choir. 

So... Here's your permission slip to copy the below message and email it back to me, if you like.  

"Dear Adam,

Please stop lecturing me about how ill-advised it would be to do something with my investments right now. I know all that. But I am worried and I need someone to listen to me and not make me feel stupid.

Thank you,

--Your Client"

Sending me that message may hurt my feelings a tiny bit, but I'll be okay. 

I'll still keep providing this kind of context going forward, but let me leave you with a final consideration: 

Every time a seller dumped stocks yesterday, some other buyer bought them. That buyer-seller relationship allows us to remember that there are optimists out there who are doing the opposite of what you hear in the news.

As a reminder, here's a link to my calendar if you'd like to chat (or just reply to this email and we'll set something up): https://calendly.com/hardingwealth/market-volatility-discussion 

That's all for now. 

Onward, 

Adam Harding, CFP