For 35 years we have been observers of the stock and bond markets and advisors to our clients. During this period there have been many, many ups and downs in the world’s stock markets. The first, when I personally started in the business, was October 1987. The US stock market suffered its biggest one-day percentage drop on October 19th, losing 23% of its value in one day. To put this in today’s terms, that would be equivalent to nearly a 6000 point decline in one day!
What happened for the next 33 years was the biggest bull market period in history. Were there some interruptions and declines? Yes many, most notably in 2008-2009, when the “great recession” removed nearly 40% of the value of stocks over a four-month period. Since that time, the stock market increased dramatically until another brief interruption in December 2018. Since then, the US large stock index (S&P 500), increased 40% in just 14 months!
So, was it time for a setback, correction, or a breather? In our opinion, yes! We believe the equity and fixed income markets have moved upwards too far and too fast. The rise has been fueled by many things, but most importantly, the recent tax cuts and ever cheaper money provided directly and indirectly by the US government since 2009. With cheap money and low returns from savings accounts, money market funds, and fixed income funds, investors reached further and further down the risk scale for returns and yields, driving up prices on all assets. Was this sustainable? We didn’t believe so, but timing and clearly identifying the catalyst for a break in the cycle and decline is always a challenge. We could not foresee the Corona virus as the perpetrator and force that pushed markets into this hard decline. Whether it was the Corona virus, too high valuations, trade war, or an earnings recession, a major market decline is our newfound reality.
Where does this lead us and what should a prudent person do now?
- Don’t succumb to the human emotional bias of “recency”, where we place outsized emphasis on what “just happened” and forget about everything else. It has been a very, very good time in the last 30 years to be a stock and/or bond investor.
- Keep investing regularly in your retirement account. For 401k investors, keep deferring and make sure current deferrals include equity funds. This is very important! You will likely look back 12, 24 or 36 months from now and be very glad you “dollar cost averaged” into any decline. This way you are automatically and unemotionally buying low each pay period.
- Remember to rebalance your portfolios to make sure you are maintaining a comfortable allocation to stocks, bonds and cash, buying the lowest price asset class. If your plan has an auto-rebalance feature, make sure to utilize it. This feature will help you to maintain a prudent allocation by automatically selling your winners and buying the losers.
- Ask yourself if your goals or situation has changed. If you are comfortable with your investment allocation and you can emotionally weather a 3, 6, or 12-month period of uncertainty and volatility, then do nothing. If you are unsure of your personal tolerance for taking on market risk, consider taking our risk tolerance questionnaire. Reach out to a Deschutes advisor to receive the questionnaire via email.
- If your goals or circumstances have truly changed…we suggest you seek out advice to help you understand your options and make informed decisions. Don’t hesitate to call our team of advisors.
- Only invest more money for the long term. Although this could be a wonderful and time proven strategy for making the most of a market downturn, make sure you do not deplete your short-term savings.
Last and most importantly, remember that investors – you, me, anyone in the markets, are paid proportionally for taking risk. If money market, CD’s and savings accounts are paying next to nothing, it’s because they have little volatility or uncertainty of returns. Stocks, and to a lesser extent, bonds, have uncertain returns and therefore more volatility in times like this.
Our best advice is to sit back, make sure you are relatively OK with your cash and safe investments, then wait. The market has always returned to its upward bias over time. The spoils and rewards go to the patient and disciplined investor.
Please do not hesitate to give a call or email. We’re here to provide insight and perspective earned the hard way, through actively advising clients during many other periods of uncertainty.