Q1 2020 is finally in the books and it will certainly be one we remember. There are many aspects to the quarter we’d like to forget - the performance of many financial markets, the volatility, and the Coronavirus itself. However, we do have some helpful information to share and since we’re all on lockdown, we’re going to be a bit more long-winded this quarter.
Our investment management philosophy is built on the foundation of knowing the purpose – more on this later – and has three principles. This quarter we thought it was a good time to review what is perhaps the most important principle: avoid market timing and manage emotions.
US stocks in Q1 were down 20.9% (Russell 3000)1. As if that weren’t enough, March was the most volatile month ever – the Dow had a cumulative absolute percentage change of 117%, which is an average of 5.3% each day!2 In May 2017 we wrote about the historical lack of volatility in the markets. March 2020 was the exact opposite end of the spectrum. With the current state of the world and the economy it is tempting to make a change and decide that there are times to be invested and times to be on the sidelines and this is a time to be on the sidelines. While this is appealing at first glance, the weighty evidence of history does not support such a strategy.
There are a few problems with such a strategy. First, you must make two correct decisions: when to sell and when to buy back in. Professional money managers have not been able to successfully do this with any consistency (which we covered in the past here). The biggest obstacle to getting back in is deciding when to buy. Most people desire to sell because of the market going down, the volatility and the uncertainty. They desire to buy back in when “the news is better”. However, when the “negatives” affecting the market are gone, almost by definition the market will be higher. We want to avoid buying high and selling low.
It should also be noted that for those who do exit the market, their stress is often only temporarily reduced, as they soon experience the stress of watching the market go higher. As we stated earlier, March was the most volatile month in stock market history. In another sense, it was also a very typical month. Historically, 53% of trading days are positive3. In March, there were 22 trading days and 11 were up and 11 were down. On a monthly basis, 63% of months have positive stock performance3. With March being negative, does that tell us anything about April? There is no correlation at all from one month to the next, which is not good news if you are trying to time buys and sells. On a daily basis you basically have a coin flip of making a good call, but as time goes on the odds against you start to stack up (in case you’re wondering, for rolling 12-month periods, 75% are positive3). Simply put, trying to time the market, especially during volatile times, is not likely to help you achieve your long-term financial goals.
Now that we’ve covered how not to invest, let’s talk about what to do. It starts with a plan. We often talk about the importance of the plan and knowing your purpose for your goals that you’re investing towards, but we often don’t talk about the plan for your investments.
The plan for your investments starts with the mixture of stocks and bonds that we’ve worked with you to customize for your situation – your goals, your money, savings, etc. This isn’t a static, forever allocation. As we often say, if something in your life changes, let us know because it may impact what your stock/bond mixture should be. There are also dates we’ll discuss changes to your allocation based on how close you are to your goal (like retirement) and we have those processes built out internally.
There are also processes around when to rebalance your portfolio. Based upon academic research into the benefit of rebalancing portfolios, we’ve implemented the strategy with the highest potential benefit, which is rebalancing when any target position becomes 20% over- or under-weight its target. The key to the strategy is that it needs to be monitored daily and over the past year we’ve invested in the technology to make that more efficient. In practice, these processes allow for a greater focus on the financial planning side. The changes continue to be rapid – from the CARES Act, reduced income and lost business to what the summer will be like –we have been continually reassessing financial plans and we are committed to providing you advice through it all.
We have worked with you to build plans with market moves like this in mind. We did not know Covid-19 was coming, but we knew something would come up eventually and your plan should be able to adapt. The ‘financial plan’ is not a static document but something we monitor, update and discuss with you as your life and the world around us changes. We believe this investment and financial planning process works, even in difficult circumstances like we are currently facing. While we are not able to meet in person at the current time, we are available to meet by phone and video to review your plan. You might get lucky and get to see our kids run in the room if we are working from home.
We want to re-emphasize to not hesitate to call or email with questions or concerns during these times. This is what we’re here for, if you’re stressed or anxious don’t wait for it to become overwhelming before you call.
1LPL Research Daily Performance Report 4/1/20
2The Craziest Month in Stock Market History, Nick Maggiulli.3Dimensional Fund Advisors, S&P 500 Index
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.