When I was a kid living in Tucson, Arizona, my family of seven often packed into our Chevy station wagon and headed to Shakey’s Pizza Parlor on Friday nights. My ten-year-old self loved Shakey’s. It wasn’t just about the pizza. There was something magical about the overall experience. Shakeys’ was always packed and noisy. Mechanical “player pianos” pounded out music. Live musicians in straw hats wandered from table to table, and we all sang along to familiar ragtime tunes. I loved that we were there as a family and that my parents were momentarily unperturbed by their five rowdy kids, possibly helped along by the free-flowing pitchers of beer.
It’s odd how some small things become seared into our memories, while others simply disappear. One such odd memory is one of the many comical signs adorning the walls that somehow inexplicably captivated me:
“Shakey’s made a deal with the bank. We don’t cash checks and they don’t make pizzas”.
I guess that just struck me as quite clever in my ten-year-old mind. They were setting the rules, but doing so with a bit of humor. In that spirit, I’d like to roll out my own new rule for you and the other clients of Comprehensive Money Management:
“CMMS made a deal with its clients. We’ll help you achieve your financial goals, and you’ll stop worrying about the daily ups and downs of the markets”.
I’m hard at work doing my part. Are you ready, willing and able to do yours?
We’re Standing Tall
“Everyone has a plan until they get punched in the mouth.” – American philosopher Mike Tyson
Unlike so many others, your plan remains strong and fully intact. In fact, thanks to this insane volatility, a few new opportunities have emerged that may help us come out stronger on the other end. Your plan was designed to weather an occasional punch in the mouth, and has handled that well. You’re still standing and looking good without much added wear or tear.
The New World Order
I’ve spent a lot of time researching coronavirus and COVID-19 – and now – with confidence – I can tell you that I don’t know how this will play out. Nobody does. It may go away in a month, or it may linger much longer. The optimist in me thinks that over the next month or two – things will get worse – then will start to get better. Just as it is hard to see what would ever stop good things from continuing forever, it is also hard for us to see how bad things will end and get better on the other side.
I do believe that capitalism will win – and that pharmaceutical companies will find a cure or a vaccine. I’ll bet on capitalism – our selfish perpetual engine with the power to do seemingly impossible things.
The realist in me hopes the optimist is right, but suspects that COVID-19 may linger longer than a few months. How much longer? We don’t know, and we don’t have to, because you have a solid financial plan that knows how to take a punch and continue to push forward – not in panic – but with dignity and grace.
All of my waking hours are focused on continually managing risk, lowering your tax bill, and repositioning your portfolio for the New World Order that lies ahead. That will likely be a world of economic deleveraging, more people working from home, higher unemployment, lower investment returns and less fervent speculation on Wall Street. Debt-fueled stock buybacks by corporate CEOs that pumped up stock prices to maximize their bonuses are likely a thing of the past. Market returns for a diversified portfolio are likely to be no more than 5 to 6% in the coming years. We’ve prepared for that. Your financial plan built in to the MoneyGuide Pro financial planning software assumes a 5.5% average annual return. Even after this recent punch in the mouth, your actual long-term average annual return is still beating that goal. Your investment portfolio and overall financial plan remain solid and fully intact.
I’m not sitting still. For the past two weeks, I’ve been furiously rebalancing and harvesting losses in taxable accounts. I’m adding value by capturing the loss in select securities for tax purposes, even as the replacement security is positioned to catch the rebound. I’ve also begun to make a few strategic changes in individual investment selections within the confines of your overall asset allocation plan.
“Life can only be understood backwards—but it must be lived forwards.” – Søren Kierkegaard
Within your EQUITY allocation (the “engines”), I’m gradually switching from ETFs that invest in the broader markets to those that focus primarily on high quality, cash rich companies with strong balance sheets. I’m de-emphasizing REITs that invest in all property types (including shopping malls and office buildings) in favor of those that focus on trends with sound demographic underpinnings, such as medical offices, senior housing and hospitals. I’m repositioning the portfolio in recognition that many small businesses will fail – and many industries will never be the same.
Within your FIXED INCOME allocation (the “brakes”), I deemphasized higher-yield corporate bonds long ago in favor of safer US treasury securities. You have been rewarded for that move, as both short and long-term treasuries have soared while corporate bonds have faltered.
Within your REAL ASSETS allocation (the “diversifiers”), gold, alternative strategies and other hedges are playing their part by cushioning the portfolio from uncertainty, economic turmoil, and corporate and consumer deleveraging. Who would have thought that Brent crude would be trading at $4 a barrel – well below the price of water – which it did earlier this past week? Or that gold would quickly rise by 25% in a few short weeks after many years of a slow and torturous decline? The diversifiers in your portfolio serve us well when the unexpected strikes, or when the engines falter and the brakes fail.
Consumer behavior will change due to this virus; and consumers are 70% of the US economy. I’m working hard to anticipate and get out in front of these changes before they are fully known and appreciated by the wider world.
We’ll Get Through This Together
I told you earlier what I don’t know about this virus. Nor do I have a crystal-clear picture of its impact on our consumer-driven economy. What I do know is that you can have clarity, or you can have undervaluation; you cannot have both. Today we have anything but clarity, but undervaluation is coming to us real fast. Bargains only happen when people are confused and truly scared.
For an added confidence booster, I recommend that you revisit my earlier blog “What Do I Own and Why Do I Own It?”. A newly updated and revised copy is attached. Each of the investments in your portfolio – the engines, the brakes and the diversifiers – play a critical role. They work together to produce the best possible long-term outcome and maximize your long-term wealth.
So, let me do the strategizing and the worrying and help you navigate these volatile markets. We may not yet be at a market bottom, but I’m convinced that the things we own today offer compelling long-term value once we get past the current period of uncertainty. I also believe that investors will be rewarded for adding new money to their investment portfolios at these levels.
Maintaining a long-term time horizon is paramount. Every decision we make, we need to make from the perspective not of tomorrow, next week or even next year – but three to five years from now.
That’s why investing is hard.