I’m sure you don’t have to be told that our country – and the world—are in a big awful mess. The Covid-19 virus has disrupted everything: our sense of personal safety, our jobs, the economy, and – for an undefined period of time – our investment portfolios.
I’m reminded of the stories my mom and dad shared with me about growing up during the Great Depression and World War II. They were stories of collective sacrifice as the world faced great and sometimes mortal threats. Of course, my parents survived (or else I wouldn’t be here), and we both know that our society will survive this as well.
Perhaps a silver lining is what doesn’t kill us makes us stronger. I’m hopeful that this crisis will bring us together as one nation and one world. We are all human, and all a bit fragile. This pandemic also reminds me that we are all on this planet for a short period of time. Perhaps this crisis may help us re-learn what is truly important and what is less so.
There is nothing that brings people together like a common enemy. This time that enemy is COVID-19 and the threats that it presents to our physical and financial health. I’m writing, not because I can add much to what you’re already getting from the media, but because I deeply want to proactively comfort you and lighten your load a bit if I can. Let me offer these thoughts in no particular order.
Keeping your head when all others are losing theirs
I would ask you to recognize that we are ALL experiencing a lot of stress as we navigate through this pandemic. You do not need to worry. I’m doing that for you! I lie awake at night thinking about you and my other clients. I’m spending many of my waking hours looking for opportunities that will help us come out stronger on the other end. I’m also thankful that tax season is largely behind me, with nearly 100 client tax returns already filed or ready to file. That frees up my time to rebalance, harvest tax losses, and look for new opportunities. I’m taking action to protect your portfolio, reduce future taxes, and reposition your investment portfolio for the gains ahead.
We all need to recognize that we’re all part of the human herd. By that I mean that you probably share the instinct to sell and get out of the way of whatever the market does in the highly unpredictable near future. Our fight or flight instincts tempt us to retreat to the sidelines. Even those of us who manage investments for a living are not immune. The outcries of the irrational, instinctive part of our brain – which scientists tell us is the most powerful – is screaming right now.
This is precisely why investing is not easy.
We are all emotionally affected by the events of the world. Neither you nor I are immune from human emotion. But despite all the emotional pressure, our higher cognitive functions must remain in control.
Are you currently thinking like a lizard, rabbit or Dr. Spock?
Scientists tell us that the human brain has three parts, the cerebral cortex at the top (which makes us rational humans), the cerebellum immediately below (which has the intelligence of a rabbit), coordinates muscular activity, and then the limbic brain at the top of your spinal cord, which controls fight or flight reactions. That bottom nodule of thinking tissue has roughly the same intelligence as a lizard.
When humans encounter danger (and the recent market behavior certainly qualifies, particularly when it is also associated with a life-threatening pandemic and global economic shutdown), the mind instinctively retreats to the limbic brain. Which means that many of us are currently functioning with the intelligence of a lizard. It’s in that kind of environment that a disciplined investment strategy really shines!
Don’t feel bad if you find yourself thinking like a lizard at this moment. We all do that from time to time. The key for each of us is to recognize what is happening with our biology, tame the fight or flight automatic impulses of our limbic brain, and strive to react more like Dr. Spock.
What to do?
If you feel shut down by fear, I understand what that feels like and empathize with your feelings. I’m here to listen. Sometimes just talking things through can pull the locus of our awareness out of the bottom of the brain toward the top.
Focus on the opportunities:
The market turmoil is giving us a rare opportunity to add value to our financial lives. I feel like a kid in a candy story when I’m harvesting tax losses and reestablishing cost basis across your portfolio. I’m also looking for opportunities to perform Roth IRA conversions at these lower valuations. And of course, the treasury bonds, infrastructure, precious metals and cash in your investment portfolio can be redeployed at a time when stocks are on sale, giving portfolio returns a boost once we get to the other side of this crisis and the economy recovers again.
I hope that you were not expecting me to tell you how long the Covid-19 epidemic will last, or to measure its long-term economic impact, or have any insights into when the markets will eventually recover. Of course, I have no idea of any of those things – and nobody else does either. Humility is a good thing to have when you’re forecasting the economy or markets. You never know what relevant facts you might be missing, so it’s best not to be too confident. Those of us who have experienced three major downturns (or four if you experienced Black Monday crisis back in 1987) remember how unexpected they were, how experts and pundits were caught by surprise, and how wrong they were when they tried to tell us what was coming next.
The Long Term:
I only know one thing: which direction the next 100% movement in the stock market is going to be. Long term investors know this. Throughout recorded history, investment portfolios typically double every ten or twenty years, especially when measured from what could be close to a market low. Cash may feel good right now, but it is guaranteed to lose value after considering inflation. Of course, getting out of markets may feel satisfying in the moment, but it begs the question of when to get back in. Most of us can’t finance our retirement earning less than 1% per year.
Selling low and buying high is not a winning investment strategy. Neither is consistently selling during market downturns and buying back in at market highs. Our highly diversified 7/20 model (seven primary assets classes and 20 sub-asset classes), routinely rebalanced, is a winning strategy. It has consistently provided high single digit returns with fewer negative years than any other strategy (see 47-year analysis attached). Note the worst three-year rolling return for this strategy was -13%. This is also a strategy that on average has resulted in a doubling of value every 7 to 10 years. This is not a strategy practiced by lizards. It is a strategy created by and faithfully followed by academics and the smartest minds on Wall Street who think and react more like Dr. Spock.
Bill’s crystal ball
I’ve been writing and publishing blogs for my clients every quarter now for 18 years. My long-term clients may remember that I often signed them “Dr. Doom”. I’ve always been a bit of a contrarian. I have found that tendency has served me well over time. That also manifests itself in feeling more optimistic when those around us are losing their heads. That’s where I am today. I suspect that the short-term pain is not over. But for long term investors, when Wall Street sees “blood in the streets”, it has always proven in retrospect to be a great time to invest for the long term.
If you need help getting through this crisis, please let me know.
Please accept my best wishes, my sympathy, and my support as you and your family navigate this crisis together. Rest assured that you are never far from my mind, and that I’m working diligently to ensure that your investment portfolio comes out of this crisis well positioned for the rebound that will inevitably come. I’m glad to have you as a client and am lucky to have a job that I truly love.
Be kind. Be smart. Be well.