Jul 8, 2020
“Stability leads to instability. The more stable things become, and the longer things are stable, the more unstable they will be when the crisis hits.”
– Hyman Minsky
Lately, it seems we have more questions than answers. Even basic decisions in life have felt like a challenge amidst the disarray. Things like trips, big purchases, or even careers/retirement can hardly be ascertained when we don’t have a clear picture of what life will be like in the next three months, let alone the next 12 months.
Let’s look at the last three months for example – could anyone have predicted we would see the strongest quarterly stock market performance since 1998? At the end of March, we were seeing surging COVID-19 cases and were undoubtedly afraid for the future. However, we were quickly relieved by the announcement of massive Monetary and Fiscal stimulus plans. Akin to a cortisone shot to an aching body, the therapy has not only taken the edge off, but brought the stock market back to its exuberant self. Still, we are left wondering what will happen when the effects wear off. What are we going to do when we have a second wave of COVID-19 cases? When will things be back to normal? Will they be back to normal?
Naturally, planning in uncertainty reminds us that we must plan for uncertainty.
Planning is easy during times of calm and stability, although we do have a tendency to extrapolate our most recent experience (good or bad) into the future, sometimes indefinitely. It’s a bias we all have – if you believe you have good luck, you’ll probably have overconfidence in the future, and if you believe you have bad luck, you’ll likely be more pessimistic about what’s ahead. It’s normal. We’re all human. But plans have to be based on realistic, probabilistic assumptions.
So, as we have reflected on these current times, we’d like to offer just a few of our insights on investment strategy and wealth planning in these volatile times (but these principles are true any time, really).
Expect the unexpected.
Just as we expressed the necessity to plan for uncertainty, it is important to remember that we will always be surprised. Once a decade or so we’ve had some form of a shock or crisis paired with a sizable stock market collapse (30%+ drop). As we’ve shared in the past, you can’t predict these events. But you can be prepared (as spoken by Howard Marks). These disruptions have happened in the past and they will happen again. Always know your risk tolerance for these types of shocks and manage your portfolio likewise.
Winning investment portfolios don’t always outperform in every type of economic environment, but they do survive every storm that passes through. You can always get where you’re going faster by speeding and disregarding safety, but you’ll never get there if you have a fatal accident along the way. A resilient portfolio focuses on quality, diversification and appropriate risk control. It also means keeping ample cash reserves (or quality bonds) to ensure cash flow during times of stress. Resilience will require creative and innovative thinking when the world shifts and not getting stuck in an old philosophy that is irrelevant when the rules of the game change. In a way, resilience is not just surviving stress, but becoming stronger because of it.
Always keep your eye on the long-term.
For most of us, wealth wasn’t built overnight. Just like our health or careers, our results are mostly a function of thousands (or millions) of small decisions and habits that add up to something great (or not so great with bad habits) over time. And thanks to the eighth wonder of the world (compound interest), your money will do the hard work for you if you let it. Time is your friend in investing, and even though we are in a period of high uncertainty right now, the truth is that the entire history of our country has been mired in extreme uncertainty periodically. Yet, the markets continue to reward investors in the long run. This is because we have a tendency to figure out our problems (and we certainly have some problems) and move forward. We would not hesitate to believe that this will be true for the next 100+ years in our country and for the great enterprises of our nation. If you have a long time-horizon (which most of you do, even if retired), we wouldn’t hesitate to continue to stay invested in stocks of great businesses (just don’t forget items #1 and #2 above).
We don’t know what the future holds, but what we can say is that many things will be different in the coming ten years when compared to the prior ten years; and remember that some change can be good. One thing that likely won’t change, however, is the need to employ prudent, sound investment strategies paired with sensible wealth planning to chart a steady course in rocky waters. Know that we are here to help and welcome deeper conversations to ensure your wealth is working to help you live the life you desire. We maintain our commitment to stay focused on building resilient portfolios that can help you achieve those long-term goals.
Our hearts are with each of you right now as we all are coping with this current crisis. While we haven’t been able to see you as much face-to-face, we are longing for the opportunity to connect again very soon. In the meantime, we have appreciated the phone conversations (and dare we say it, the video conferences). Thank you for your continued support and confidence in NPF.