Remember that the simple concept of “buy low, sell high” is impossible without “low” times. When prices fall, you can either follow the crowd and sell – or you can be optimistic about potential opportunities.
“After a stock market decline, people may perceive more risk than before when, in fact, the decline may have taken some of the risks out of the market.”— Robert Shiller
During times of financial stress, investors should generally keep a long‑term orientation and remain grounded in the fundamentals. That’s been difficult to do during the coronavirus pandemic as the short‑term dynamics are changing rapidly and there are so many unknowns.
While this philosophy is valid, perhaps a slight modification makes sense now: Focus on what the fundamentals should look like on the other side of the crisis and build a bridge to get there. Make sure that your near-term cash flow needs are funded and look for opportunities to enhance returns with assets that you don’t need to sell anytime soon.
Market corrections are common, and over a long enough timeframe, they’re a virtual certainty. But it’s impossible to predict exactly when they will happen and what will cause them
Fortunately, market corrections are usually short-term events. As active managers, we recognize that corrections may very well create buying opportunities for patient investors. While adding to stocks at attractive prices is a smart decision over the long-term, it is also risky in the short-term. The market is cheaper than 4 weeks ago, but still not cheap. Gyrations of 5% to 10%, up and down, may continue in the near term.
Stick to a Plan
For clients with a portfolio that matches their time horizon and risk tolerance, and who don’t need to sell anytime soon, it’s usually best to stick to a plan. Given the extraordinary price moves in bonds & stocks over just the last few weeks, our portfolios have drifted from their target allocations. In many cases, our discipline calls for increasing equities back to normal allocations. Since volatility may continue for some time, we recommend gradually adding equities.
However, for clients that need to take income from their portfolio, the best action might be to take steps to minimize the negative effects of selling in a down market. This may include taking profits, harvesting losses, cutting back on riskier investments, and buying high quality fixed income securities, such as CDs, US Government bonds, and even AA-or AAA-rated corporate and municipal bonds to fund your income needs for the next 6 to 18 months.
There is No On-Size-Fits-All Answer
Investing is important to all investors. Discipline is important to all investors. Which investments and which discipline are more personal decisions. There is no one best way to invest. This is when having a close relationship with an advisor your trust is critical.
Investors need advisors now more than ever. Our main task now is not to forecast market returns or predict how & when the coronavirus will spread. Rather, it is to help clients keep their heads when everyone around them is losing theirs.
We want clients to know that we are making the best long-term allocations based on thorough, careful analysis, taking risk and return into account.
Thank you for your continued confidence.