These are the times that try investors’ risk tolerance, patience, and behavioral biases . . . and men’s and women’s souls.
Modern portfolio theory drives our processes at Glass Jacobson. This approach to investment management basically suggests developing an asset model that is consistent with the client’s risk profile, time horizon, and financial goals. An Investment Policy Statement is meant to be dynamic and changes if there are shifts in any of these three parameters.
To give an example, a portfolio might have an overall allocation of 30% fixed income, 60% equities, and 10% alternatives/hard assets. The bonds are meant to serve as a safety net that will provide limited loss of principal during equity market declines and can be accessed for short-term cash needs; while the balance of the portfolio targets intermediate and long-term growth.
Managing the Market Chaos During the Coronavirus Outbreak
During the initial days and weeks of the market malaise, the credit markets were out of whack and there seemed to be no place to hide, short of going to cash. History tells us this is the absolute wrong move.
Initial instincts to time the market are motivated by emotion and impulse and all but guarantee lower-than-market returns over time. If the reasons for your asset allocation strategy have changed, we recommend scheduling a conversation with an investment advisor to consider portfolio adjustments.
If cash is not required to meet living expenses each month, and you have a “bucket” of funds to access for other expenses that come up (e.g., renovations or new purchases), then it’s better to invest into or at least maintain your investment profile, particularly in market downturns such as Q1 of 2020.
The less we act out of panic or emotion, the better we can navigate the volatility. As the old saying goes, this too shall pass.
Stocks Are a Long-Term Investment
Prior to the uptick during the second full week of April, equity markets had effectively declined to 2016 levels, wiping out three years of gains. But the market roared back during the second week, showing the resiliency of the U.S. economy in general and equities in particular. At the start of the third week, the bears are out once again in full force, dragging the market lower.
Despite this nerve-wracking volatility, equities are still the best investment on a risk/reward basis and should play a dominant role in a portfolio, even more so now given the zero-interest-rate environment that seems all but inevitable.
It’s important to note that wealth is created/accumulated over the long term during bear markets. If an investor had no issues buying equities three months ago when indices were much higher, then equities should look very attractive now, with prices 25-30% lower.
Low Prices Create a Buying Opportunity
Assuming you still have a long-term focus, to the extent possible I advise dollar-cost averaging into this market volatility over the next 4-6 months. I’m looking to re-balance later this month and into the next as the credit markets have settled and created an opportunity to sell fixed-income assets and buy stocks.
Equity markets are leading indicators. They baked in worst-case scenarios weeks ago as indices declined sharply. Evidence of this is the fact that we have seen decent rebounds this past week with little in the way of good economic news to justify it. I believe we will have continued volatility going forward and will likely retest lows. But unless you need the money tomorrow, the dips are opportunities to buy cheaper shares.
I’m available at any time to discuss your investments, the markets, and my strategy. Please don’t hesitate to contact us if you have questions or concerns.