I can’t speak about COVID-19 from a health and safety standpoint, but I can offer up this understanding of it from a market perspective. We are experiencing a “systematic risk” right now. Risks in the stock market can be split into systematic and unsystematic risks. In short, systematic risks are out of anyone’s control, while unsystematic risks are controllable.
A guiding investment approach is to control what we can control – those unsystematic risks: cost, portfolio exposure and allocation, time in the market, and staying the course as a disciplined investor during good and bad times. We cannot control systematic risks; systematic risks are unpredictable and nearly impossible to completely avoid, too. Common examples of systematic risks are interest rates, taxes, inflation, and the overall health of the economy. A more acute example of this is COVID-19. It remains to be seen if our response to COVID-19 is appropriately proactive or an overreaction. Regardless of the correct response, we have and will see an impact at the global economic level, and we have and will see an impact at our personal portfolio level, too.
As we come out of this and we look back, we’ll see the global economy will have slowed, just like our portfolios, but similarly – at some point – the global economy will rebound, and our portfolios will rebound, too. We will continue to control and mitigate unsystematic risks; systematic risks will always be present, and they will always be impactful. How we respond is paramount (both in an overall sense, and at our portfolio level). We can’t panic, this might get worse before it gets better, and we must look for opportunities to inject money into stocks while markets are down, and things have slowed. The US market has fully recovered from every historical market panic, and this time will be no different. In time, our resolve will reward us.
CORONAVIRUS, THE MARKET, AND WHAT YOU CAN DO ABOUT IT
I’m sure you’ve been slammed with Coronavirus emails, and no doubt, your portfolio has felt its effect, but I’d like to share another one with you.
Think back to May, 2019 – just 10 months ago – you probably have no idea where the stock market was then, right? At that time, the S&P 500 was the price it was today…and the price it was in January, 2019, and November, 2018, and December, 2017. While it’s tough to see gains like these given back, the give back is temporary, and if you could go back in time and buy stocks at prices from May, 2019 and earlier, you’d probably take that opportunity. Well, that opportunity is now to put more money into stocks – cuz remember if you’re owning stocks, it’s because you have the appetite for the risk and reward that comes with owing them; and owning stocks doesn’t need to be an all or nothing affair, either (typically, those with longer time horizons will have more stock ownership) – a big slice or a small slice could be appropriate for you – so look to make your 2019 IRA contribution now, look to allocate some additional cash to your retirement portfolio, and we’ll look to rebalance your portfolio to put some money to work.
IS THE STOCK MARKET INFECTED?
Undoubtably you’ve heard about two things this past week: Coronavirus and the stock market.
To recap: markets suffered their worst week since during the 2008 financial crisis with all three major indexes falling over 10%. It’s shocking and it hurts to see our portfolios take that kind of hit. Will this market sell-off continue? Will Coronavirus be the catalyst that turns a market correction into a bear market or a recession, or are we overreacting to a virus which may turn out to be far less impactful and harmful than winter flu? We don’t know.
But we do know stocks are at levels we saw in October, 2019. Had stocks stayed flat from then until now, how would we feel? We’d probably have less angst and anxiety than we do now, right? If our portfolios had stay flat for five months – even with this Coronavirus uncertainty – our emotions would probably have stayed flat, too. But when our portfolios make slow and steady movements up, but then come crashing down in a week and half, we feel different, despite the result being the same – and that result is today’s portfolio value mirroring October’s portfolio value. So the outcome is the same, but the route we took to get there was different.
Regardless of the route, we’ve got to stay focused on the long-term growth of our stock portfolios. Global uncertainties happen, market corrections happen, bear markets happen, recessions happen, and all of those will continue to happen, but what will also continue to happen is the one ultimate direction of the stock market: UP!
If we go back to that worst week in the last 12 years, the S&P 500 was around 900 (before ultimately bottoming below 700), today it sits a touch over 3,000. And think about all the global events, positive and negative, that have occurred since then…take the Coronavirus, the financial crisis and everything in between and realize that all market downturns do is present great opportunities for you to build wealth…great opportunities for you to buy good stocks on sale.
And that’s what we do for our clients - we stay calm during times of panic and we steadily focus on the long-term wealth building opportunities that is a diversified stock portfolio while seizing opportunities to buy good stocks on sale.
Q4, 2019 MARKET SUMMARY REPORT
Here you’ll find DFA's Q4, 2019 Market Summary. Page 4 will show stock and bond market returns for major indices around the globe. You’ll see all green arrows for 1, 5, and 10-year returns. While we typically expect returns to be positive over 5 and especially 10 year returns and beyond, the very healthy positive returns we saw in 2019 should not be assumed to continue nor should be expected to be this robust year over year.
We can enjoy these strong returns and use opportunities to rebalance money from the outstanding market performers into the still positive but less performing areas of the stock market, and / or we could look to take some money off the table, if your portfolio objective allows for it. Ultimately, it is important to stay grounded and to not get too high with the highs, nor too low with the lows.
The final two pages tie in nicely into the idea of staying grounded and not getting too high (or low) in response to your portfolio’s performance. According to a recent survey by DFA, sense of security / peace of mind was the most popular answer when respondents were asked “How do you primarily measure the value received from your advisor?” Our job is to talk you off the ledge when returns are down…knowing those down days are temporary, and to keep you grounded when markets seem to be making new highs almost every day - knowing those days can be fickle, too and knowing today’s bull market can turn into tomorrow’s bear market.
MARKET MOVERS AND THEIR OVERALL IMPACT
Stock markets are comprised of a collection of stocks. Good stocks, bad stocks, and all stocks in between can be found in a particular stock market. There are multiple stock markets across the world, and while we can’t directly invest in those markets, we can invest in products that closely track those markets. As I wrote above, all types of stocks are found in a stock market, so what happens to returns when we pull out a specific group of stocks?
It is common for a subset of stocks to drive a sizeable portion of an overall market’s return. Here you will find a DFA study that shows removing the top 10% of performers each year from 1994 to 2018 reduced global market performance from 7.2% to 2.9%! And further excluding the best 25% turns a positive return into a relatively large negative return!
If only we could predict which performers would be the best – and the worst – we could ramp up our returns…but we can’t. And oftentimes past best performers don’t continue their strong performance into future years. Therefore, we must own a diversified portfolio. We don’t know which stocks will be the best, or the worst, or somewhere in between, but if we hold all of them, we’ll get the best, the worst, and the middle, and be left with a pretty decent return on our investment. If we pick and choose, and get it wrong, we’ll be left with paltry returns, or even no returns and actually a loss of our money…something we can’t have happen when we look to build our nest egg for retirement.
When we own everything, we’ll do well over any length of time.
Q2, 2019 MARKET SUMMARY REPORT
Here you will find the Q2, 2019 Market Summary Report. Typically, I draw your attention to an informative or thought-provoking (in my opinion, at least😊) write up that concludes the quarterly report, but this time is different. On page 4 (pasted below, as well), you will find the Long-Term Market Summary for major index returns over the last 1, 5, and 10 years. I think it’s a very powerful graphic showing the importance of owning a diversified portfolio covering all these markets – you’ll see big green arrows all across the board! We know short-term time frames of especially 1 year, and even 5 years can exhibit very wild and unpredictable returns, but 10 year returns start to show pretty reliable numbers – typically you will find two things: 1) positive returns; and 2) stocks offering better returns than bonds. We know owing stocks (for growth) and bonds (for protection and income) for the long-term are a great wealth building and wealth preserving tool and graphics like these reinforce that belief.
