Apr 1, 2020
“The truth is, the next crisis won’t be caused by the same problem…It will likely come from something we are not watching or thinking about (although in hindsight, it will seem obvious). That’s what makes it a crisis.”
– NPF Client Letter, January 2020
There’s no easy answer for the best way to navigate this current crisis. This time is different, but honestly, they all are. Just as we stated in our past missives, a crisis paired with a sizable market meltdown (30%+) was a near-certainty, at some point in the future. We just never know when it will start or what exactly will cause it. Nor can we predict what causes the next one (and there almost certainly will be more).
What we do know is that markets follow similar patterns – just as we believed a market pullback would happen eventually, we feel equally confident that a market recovery will happen eventually. However, the when is just as elusive to our desired degree of certainty as the events leading up to the beginning of this bear market.
But the playbook stays the same. Nothing has changed, other than perhaps our volatile emotions (which, by the way, is what gets in the way of successful investment strategy execution). The strategy to use from here on out is the same strategy that was put in place from the outset – an appropriate mix of assets to meet your long-term risk tolerance and return objectives, adjusted occasionally to maintain that mix over time. Does it really make sense that after experiencing a massive price decrease, that stocks have somehow become riskier on a long-term expected return basis and should be sold? Of course not.
On the contrary, stocks become riskier when prices rise relative to the realistic outlook for future accumulated profits of the underlying business. But when stock prices continue to march upwards, our base-level instincts (a.k.a. FOMO = Fear of Missing Out) kick in and trigger a desire to own or buy more stocks. Sound familiar?
That’s why having the long-term plan is paramount – as humans, we need to have (sometimes even forced to have) discipline to prudently decrease our exposure to stocks when it feels the most fruitful, and reciprocally, be able to buy or add to stocks when it feels the most uncertain. All the while, only keeping an amount in stocks commensurate with your willingness and ability to deal with the pain that comes with experiencing large swings in prices (yes, sometimes as much as 50%+ downward moves). Let’s just say you will not be ready to be opportunistic if you are worried about having enough secure assets (cash & bonds) to cover your bills for a few years without having to sell stocks at a discount, for example. Or, even worse, you know that seeing your portfolio value drop below a certain dollar amount may cause you to bail before being able to see the plan play out – in this case, the “behavioral” risk of owning too much in stocks is high.
So back to the situation at hand. The right thing to do is difficult in practice because it works directly against our intuition, which tells us “cut and run!” when the market is plunging, and “let it roll!” when the market is soaring. The old adage “buy low, sell high” sounds good in principle, BUT it doesn’t feel like the right thing in the moment. When “buying low,” it feels like you are shoveling money into a furnace, watching things go down more and more every day. The smart thing to do seems to be to sit in cash and wait – but that is the wrong thing to do. In contrast, when “selling high”, it feels like you are missing out on easy returns, because you’re watching things go up every day. The smart thing to do seems to be to hold on and buy more – but that, too, is the wrong thing to do.
We can’t say how long it will take for the market to find a bottom (or if it already did, for that matter). But what we can say is that the asset prices for stocks (and in some places, bonds as well) are more attractive now than they were three months ago and are likely priced appropriately for a high likelihood of gains over the next 3-5 years (as we shared in a chart in one of our recent market update emails).
Additionally, as stock-pickers, we can look at the values of individual businesses and buy companies we feel confident that are trading below their long-term “intrinsic” value due the fear that is being priced in this current market environment. And, likewise, we can also make sure that none of the companies we own are overly exposed to risk that may impair the business value during a crisis – namely, too much debt or an exposure to an end-market that will have substantial demand-side pressure not fully recognized in the stock price.
We know this time is not easy for any us. If worrying about the health and safety of yourself and your family is not enough, we now have to traverse through another rocky and uncertain time in the markets. Rest assured, we are committed to helping you through this time and feel good about the conversations we’ve had with you to make sure the right plan is put in place.
Please feel free to send us a message or give us a call anytime. We are grateful for your continued trust and confidence in this highly uncertain time. Stay safe and healthy!