Juris Wealth Broader Perspective in the Midst of Market Turmoil
Given the significant market volatility we are seeing, I offer the following perspectives to my clients and friends:
1. What the markets have done (so far):
Stocks - Since Wednesday, February 19, U.S. stocks have fallen roughly 14% (the S&P 500 closed just short of 3400 that day, and as of Friday, February 28, the index closed just under 3000).
Bonds - Bond prices are up, pushing yields down, which is what we typically see when investors flee "risk assets" (stocks) and seek refuge in safer financial assets.
2. Conceptually, there are two things going on now:
Pure fear-based selling - As can be seen in the CNN Fear & Greed index, which is currently at a 10 out of 100, we're in "extreme fear" territory. This index is based on a measurement of a number of relevant factors, such as how broad the sell-off is, market volatility, demand for US Treasuries vs. stock, etc.
Limited ability currently to rationally re-price assets based on informed assessments of the economic impact of the coronavirus globally - There is simply a lack of clarity on the full impact of the coronavirus on peoples' health, on the overall economy, impacts to supply chains, etc. And as risk increases during a time of of heightened uncertainty, so do the returns investors demand for bearing that risk, which pushes prices lower. As investors become better able to assess the specific and actual impact on companies and economies, and ultimately on returns to shareholders, prices will reflect this actual knowledge vs. reflecting today's lack of knowledge. It's not clear where that will lead stock prices in the short-term, but that is what will happen.
3. What can we expect going forward?
Long-term - Perversely, perhaps, this is where we have the most clarity. Does anyone doubt that eventually the world will find a cure, or therapies or means to control the outbreak? To be sure, the emphasis is on eventually. But so long as you are a long-term investor, as I am, our fortunes are tied to stock prices in the decades to come. And truly: does anyone believe that today's crisis, regardless of how significant and frightening, will materially impact stock prices in 2030, 2040 or 2050? A thought experiment on this point: think of yourself 20 years ago. Or of your parents 40 years ago. Or of your grandparents 80 years ago. Now imagine you (or them) in the midst of the most unsettling investment environment you could imagine: the week of D-Day.... the Cuban Missile Crisis... 9/11... the AIDs epidemic... you name it. What would you tell those people to do? You'd tell them to keep their portfolios fully invested, and if they had the money to do so, to keep investing. That advice has proven correct 100% of the time. If you are truly a long-term investor, the "future you" would tell the "today you" the same thing now.
Mid-term - Even if you believe stock prices will continue to decline, and even assuming a recession were to occur because of hits to the economy, how long might it take to recover? This is a good summary of historical corrections (10% declines) and bear markets (20%) declines, and the time it has taken for a recovery. Remember the 2007-2009 bear market, where equities dropped more than 50%? This headline from April in 2012 sums it up: "2007-09 bear market now totally erased." If you believe "this time is different" there is a lot of historical precedent (all of it, really) that you'd be arguing against.
Near-term - You can quote me on this: "I have no idea as to how stocks will behave next week or next year." Actually, more accurately, that would be me quoting Warren Buffett from his 2018 letter to Berkshire shareholders (page 6).
4. The critical importance of diversification:
Diversifying a portfolio with stock vs. bond allocations - The relative mix of equities vs. fixed income assets is fundamental. My clients know I harp on this a lot. Your portfolio should be constructed to reflect your risk tolerance, and one factor in that analysis is your willingness to stomach market gyrations. To the extent you have bonds in your portfolio, there are two clear benefits to this in the current market environment: (a) your overall portfolio decline will not be 1:1 with stocks, and (b) given bonds are showing negative correlation with stocks, and so have gone up, your portfolio is further buoyed. To be sure, having any amount of bonds in your portfolio will lower your long-term expected return vs. a portfolio comprised solely of equities. So the volatility dampening benefit of bonds in a portfolio comes at a price, but one which many investors find worth paying, particularly in markets like the one we are in now.
Diversification more broadly: by geography, by market segment, etc. - I'm not going to make any bets on how the coronavirus will impact financial asset prices differently in different parts of the world, or in different sectors. There are no shortage of pundits who will venture a guess, but the truth is, relative over- or under-performance is pretty random. Take a look at this chart here. It's a year old, but that's irrelevant, because the key point is this: in any particular year, or period, you cannot predict which asset classes or geographies, etc. will perform relative to one another. So we spread our bets.
5. NOW is a good time to get your financial house in order:
I'm very comfortable that each of my clients are well positioned for the long-term. You should all know how your portfolio is constructed, why, and how we're positioned for the long-term. If there are any areas of discomfort: call me.
If you are not a client, and you do not yet have your financial house in order, you should do so. Know that a well-constructed financial plan can absolutely take into account the unknowns, such as we are facing today. Let me help you control what we can (which is a lot), and figure out how best to ride out this storm.
Call me if you'd like to talk through any of this. It's a stressful time, and I'm here.
Tim Corriero
(415) 990-1133
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