Webinar Summary: What Investors Need to Know Now

We are on an emotional roller coaster when it comes to the market. It’s up, it’s down, it’s up and down again — it’s scary. While fear and anxiety are natural and important evolutionary tools, one big mistake is to act on these emotions when investing. Acknowledge the emotions, but don’t make decisions based on them.

You hopefully had a plan in place before the crisis started and this is why: when your emotions run high you stick to the plan, stay invested, and ride it out. When you ride a real roller coaster, you stay in your seat to protect yourself. The only people who get hurt on a roller coaster are those who jump out.

Every time we invest a client’s money we ask ourselves, “Would this client be okay and would we be comfortable if a bear market started the next day?” And the answer must always be yes. That is our litmus test. We are now experiencing that scenario.

Overall, the market is healthy and well-functioning, even during this stressful time. In fact, the market is doing exactly what we would expect it to be doing. The functionality of the markets has not been impacted by the virus. The expected profits of companies within the stock market are what’s being affected.

A company’s value is based on the profit investors expect to receive in the future. Stock prices are falling because the expectations for future profits are lower. The value of these companies are not worth as much and therefore are selling at a lower price. (As they should be. You wouldn’t want to pay as much for a company that’s not worth as much!)

The market reflects both the pessimists and the optimists. The pessimists are those selling off the shares of companies dropping in value. The optimists are buying them up at a low price. For every fear-based seller there is a long-term, planning-driven, goal-focused buyer. 

All we can do now (and always) is analyze the available facts, data, and information. And you know who is exceptionally good at doing that, almost instantaneously as new information becomes available? The market. The market knows what exponential growth is, it knows what the models are projecting for the virus, it knows what Dr. Fauci is saying, it knows the death and recovery rates. And it has judged the future economic impact as reflected in the market drops we have seen.

We are the optimists. We believe in buying low and selling high, but we are not just buying up every cheap stock on the lot. We are engaged in a systematic process called rebalancing and are continuously assessing each portfolio we manage. The goal is to always have the portfolio in a state of balance.

This is not a passive process, but we are also not market timing. There are many issues with selling now and buying when the market “goes up” or “when things look better.”

1. It’s extremely stressful. Doing that just replaces one stress (losing money) with another (not knowing when to get back in).
2. To time the market successfully, you must be right twice. It’s extremely difficult to do and very unlikely. You must know the exact time to get out AND the exact time to get back in. Looking at the day-to-day, up-and-down roller coaster that is the stock market, this is not recommended (see #1).
3. By the time the smoke clears, it will likely have already been too late to get back in. In 2009, when the economy and unemployment was seemingly at its absolute worst, the markets had gone up over 25% — around twice the historical average. In fact, the market is almost always a leading indicator of the economy.

In short, if you sell low and the market recovers before you buy again you have locked in the loss. If you hold on, when the market recovers, you haven’t lost anything.

There are, however, situations when it’s advisable to sell when the market drops, especially when there is an opportunity to mitigate future taxes. Along with rebalancing, we also do tax loss harvesting in the portfolios we manage.

Each year, there are a number of tense moments in the markets, economy, and news. If we reacted to each of these as a signal to sell, then we would never make any progress toward our investment goals. In other words, the vast majority of would-be crises are false positives. Once every five years or so there is a real crisis, but it is almost never clear until the markets have already dropped significantly.

Also keep in mind the market does not have a present tense. We can only speak of what the market did in the past, or what we expect it to do in the future. It is quite tempting to speak about the market in the present, such as “the market is going down.” But this is not a well-defined statement and the act of clarifying the concept often answers the underlying question on how to proceed.

This is certainly a unique situation and we have never seen anything quite like it before. This virus is affecting every single person on the planet. We have been asked to stay in our homes, and to stay 6 feet apart from anyone we meet outside. Social distancing is a new term we all understand. Parks and beaches are closed, and kids are home from school. Restaurants have mostly closed their doors and many businesses cannot function at all. An unprecedented amount of people are out of work and filing for unemployment.

And yet, we can look to the past to try and identify other times when we have said, “Nothing like this has ever happened before,” or “We’ve never seen anything like this,” or “This time is different.” Indeed, we have said all these statements before. We said it in 2008 when the financial system collapsed. We said it in 1973 when the oil embargo hit. We said it at the start of WWII. We’ve said it many, many times. The many challenges we have overcome as a species and as a modern civilization are astounding. So, yes, we can look to the past for guidance.

Crisis will happen. Change is inevitable. And humans are made to adapt. We are resilient and so is our economy. Not only did the market and the economy recover after each of those times, we have a better system because of it.

At the end of the day, markets are resilient because companies are resilient. Companies are resilient because people are resilient. Behind all of this are people coming together, united by a shared fear of the unknown, and then by their perseverance, their creativity and innovation, and by their dedication to their values.

Meet with a financial advisor to discuss your goals and determine your risk capacity. Depending on your plan, you may need more stability than growth, or vice versa. That is a personal decision an advisor will help you make.

Your portfolio likely contains a mix of both stocks and bonds. These bonds offer much greater stability than stocks. Along with rebalancing and tax loss harvesting, cash management is the third major piece of the pie our investment team is focusing on at this time.