Ladies and Gentlemen, This is Your Pilot Speaking

As I get used to the new (temporary) normal, working from home each day, I’ve had the morning news shows running in the background and find myself each day stopping my work during the segment where they have a doctor on who is answering write-in questions from viewers. I’m paying attention because in many cases, it’s the same questions I have. In that light, I thought I would use the questions my clients have been asking and share my responses as their questions likely represent your questions.

Before I do that though, let me share this quick story. I was talking with a client the other day and we were discussing my role for clients in moments like this and he likened me to the airline pilot who comes on the loudspeaker and says “Folks, we’re about to hit some turbulence so I’m going to have you stay in your seat, fasten your seat belt, and we’re going to stop serving drinks for a bit while we navigate our way around this. Don’t be alarmed as it gets a little bumpy. We have it under control up here in the cockpit.” I’ve been on flights where the pilot does say something like that, and also on flights where they have not. Which flight is more nerve wracking? Of course, when we know something is coming, our stress is always more manageable. If you have not done so already, please take a moment to read my pilot’s message: “Folks, it may seem different this time, but rest assured, the future is always the same.” Now, for some Q&A:

“Is there something you think I should be doing during this time of uncertainty?” (from a client with 20+ years until retirement)

As difficult as it may be, try to stay calm and continue your regular investment schedule. Easier said than done, but I would point to this post as a helpful reminder that major market corrections happen and eventually they work themselves out. It’s stressful for sure, but this too shall pass. We have a plan here to continually monitor portfolios and markets. This is why we encourage clients to maintain safe levels of cash and not overextend themselves. Once they arrest the spread of this virus, we would expect the market to put itself back together pretty quickly. Until then, we expect continued volatility, which for someone like yourself, presents a great opportunity to invest for the long-term at depressed prices.

“For the time being, should we be putting all dollars into bonds rather than equities?” (from a client within 8 years of retirement)

Quite the contrary, purchases today should be in equities, especially if you’re buying broad-based index funds. There are several advantages to buying these broad based indexes, but the most important one is that we essentially eliminate the risk of permanent loss of capital, as discussed in the blog post I wrote on Saturday. The S&P 500 is 29% off its Feb high of 3,386. If this doesn’t get too prolonged and we get the Coronavirus contained, I would expect a steep recovery. Anything bought today is at a pretty deep discount already. If I unpack your question, I imagine the basis is concern about the market today. So walking that down the line a bit further, would you feel more, or less confident buying at a later date, after a bigger selloff? If emotions are high now (rightfully so, and totally normal BTW), what will they look like if the S&P drops another 10-15% based on COVID stats? If emotion is a driver, the sense of “it’s safe now” won’t come until the market has likely far surpassed current levels, meaning you will have bought at higher prices than today. Now is the time to buy equities, as equities serve your long-term needs. It’s not easy because our emotions are often far more powerful than our logic, but that’s my job – to help us make decisions through the planning framework we have built, and use our rationale, research-based logic to keep us focused for the long-term.

“What do you think about buying the stock of some of these companies that are working on the COVID-19 cure? BTW, I went into my company retirement plan and moved the majority of my money to a guaranteed fund after losing roughly 25% in my stock funds.  I will redistribute once things stabilize, but couldn’t stand the continued drop in value.” (from a client retiring this year – company stock names removed so as to not be mistaken as specific advice)

Let me merge both of your questions/comments into one answer. As you read this, please know I am not discounting the high emotions everyone is feeling as we watch the markets and news headlines around COVID-19.

I think both of those COVID investments are speculative and may or may not pay off. Company A has already been bid up 70% from Feb 20 to today. Company B is up 22% today since Feb 20. They are some of the few stocks that are positive in that window. To what degree are you certain one of those two specific companies will discover the cure and deliver the vaccine? Will the government grant a patent on something that could cure a global pandemic? Conversely, to what degree are you (or could you be) certain that the equity index funds in your retirement plan will recover, given they are broad based stock indexes and historically have always come back? See The Future Is Always The Same for more info.

If Company A or Company B do create the vaccine, yes the price should jump but are the odds in your favor that one of these companies will find the cure, or one of the many other companies trying to solve this same riddle? And if it’s not them, then all the bid up from the Feb 20 prices listed above will likely recess. Now compare that probability to the question of whether the S&P 500 will recover back to its Feb highs at some point. I believe this is far better odds than Company A or Company B hitting the jackpot of discovering the cure before any of their competitors.

If you agree, then you allowed emotion to drive your retirement plan decision, rather than logic. Let’s look at it another way:

  • You moved the majority of your retirement plan equity money into a guaranteed account and will move back once you feel its more secure. Based on normal emotions, it won’t be if the market drops more; instead it will be after the market has recovered (everyone’s definition of “more secure”) at which point you will have locked in that loss; and
  • If you agree with me and history, the broad markets will recover from this correction, just like they have every other time, so yes it may be painful to watch, but the equity index funds will all recover; yet
  • You seem willing to gamble some money on Company A or B, both of which carry the worst investment risk (permanent loss of capital) if they go out of business (just like all company stocks), and a very likely drop in value if they are not THE ONE to cure COVID-19.

My honest assessment, there is more risk in the Company A & B idea than there is in leaving the retirement plan alone and accepting the volatility in pursuit of the long-term averages. One more question…what would cause the entire market to JUMP back up? Answer: Containment of this virus and certainly a known cure, regardless of who finds it. Thus, the retirement plan equity index funds are likely are destined for recovery no matter what at some point, but the only way to make money on Company A & B stock is for them to find the cure. Otherwise, all the additional risk you take in buying an individual stock may not be not worth it.

In summary….

  1. I would consider putting your retirement plan back in place as I think your greatest challenge will be when to find comfort in doing that if you wait. It will most certainly be at a higher valuation than you just sold it. That would create a Sell Low & Buy High scenario.
  2. If you want to make some money off this recent correction, rather than speculate on Company A & B stock, just buy an S&P 500 index fund and wait for the certain recovery at some point. Had you bought that S&P 500 index on Feb 19th, the index was valued at 3,386. Today it is trading at 2,394. That’s a 29% discount to a month ago.
  3. The best strategy in the retirement plan was not to sell stock and buy the guaranteed fund. It was the opposite – sell the guaranteed fund and buy more of the equity index funds at depressed prices through normal portfolio rebalancing.

In all of these answers I provided clients in the past few days, there are a few common themes:

  1. Volatility drives emotional behavior. Draw upon your inner logic in these moments. If that’s too difficult, seek the advice of a professional advisor. Remember, I have always said emotion is one of the reasons to have an advisor.
  2. Invest for the long-term. My preference is through broad-based, low-cost index funds. (Vanguard, iShares, SPDR, and Schwab are companies we routinely use)
  3. Now is not the time to sell stocks. If the rule is buy low & sell high, then now would be a good time to buy stocks.

These are unprecedented times and though logic is far more productive than emotion, the latter is often granted the majority of power. Fight that urge.

Keep Calm and Invest On.

Jamie

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