It’s official – the almost 11 year bull market is over thanks to a couple of “black swans”: COVID-19 and the oil price war.
Quick terminology recap here:
- Pull-back – a falling of a price from its recent high, typically 5%
- Correction – typically 10% from recent high
- Bear Market – 20%+ from recent high
Within a few weeks, we zipped past just a pull-back and correction and are officially in a bear market. Further, a recession is imminent with businesses about to take a hit from “social distancing” and broken supply chains. The US government is trying to get its arms around this threat and is working to eventually restore life back to normal. In the meantime, uncertainty continues. The market hates uncertainty and investors’ portfolios reflect that.
We’ve had pull-backs, corrections, and bear markets before. What’s different this time is the personal impact or the “human effect”. I think all of us have personally felt the coronavirus impact us in the last couple of days with upcoming plans being altered. Many are coping with tough travel decisions with Spring Break around the corner. Handshakes have turned into elbow bumps. Many employees are working from home. And our cherished past time of watching sports gets disrupted with major sports suspending their play. Heck, even Tom Hanks and his wife have tested positive for COVID-19.
Yes, this is certainly different from the Great Recession of 2008 as that didn’t impact personally like this threat has. And because of it, the level of emotion is stronger. And the emotion of fear is dominating right now. And with the help of the media, the fear is building upon itself and, for some, creating panic.
This downdraft has happened so fast – it was exactly one month ago that the stock market was hitting its all-time high – that even if you wanted to, it was almost impossible to react. Stock benchmarks are down over 25% as of this writing. This volatility for most is stressful, unnerving and can be tough to stomach. Fortunately, a balanced portfolio that holds multiple asset classes – not just equities, but fixed income and alternatives – has helped cushion the blow, but not by much given that most investment styles are down.
People struggle to separate their emotions from their investment decisions. See the slide above which shows how emotions relate to the different stages of the market. These emotions cause these investors to sell and buy at the worst times as this “recency bias” influences undisciplined investors to chase performance through buying high and selling low.
Now see the slide below which shows what happens when an emotional investor who went to the sidelines and missed the best ten days. The average annual return dropped from 6% to 2.4%. If that investor missed the 30 best days, their return goes negative.
The moral of the story is you don’t want to try to time the market. You should stay the course and stick with your long-term asset allocation target mix. We have had multiple discussions with our clients about risk. Risk tolerance, risk capacity, and risk perception. And from those discussions, we have identified appropriate long-term asset allocation target mixes. This crazy environment is a test of character to stay with that disciplined strategy and not give in to fear. It sounds hard to do, particularly, in scary times like now, but disciplined investing has ALWAYS paid off. The market inevitably always bounces off its lows to eventual new highs.
We aren’t calling this the bottom, by no means. We don’t know exactly what tomorrow brings. No one has a crystal ball. The market could trade lower, but if you have faith in our country pulling through this pandemic like it has in the past and understand this threat will be beaten, then remain disciplined and fully invested in your long-term asset allocation. We understand that everyone is wired differently and based on your current perception of the risk today, that may be hard to do. If so, please contact us so we can discuss further.