Our message to remain true to your financial plan and focus on long-term goals rather than today’s headlines is a familiar one. Cynics may wonder why our commentary is so plain and treats common sense as not-so-common. We don’t forecast GDP. We’re not trading in reaction to Tweets. You don’t see sector rotation, charting, or Greek letters in our communications.
It’s tough to write in reaction to short term market movements as each client’s situation is different. We truly design every client’s portfolio according to their individual needs. We are not trading wholesale in and out of positions. We do not have model portfolios. When we do make changes to asset allocation, they are thoughtful (not reactionary) and executed with an eye to controlling what we can control (taxes and fees) for each and every portfolio. Our commentary is intentionally broad as we have a diverse set of clients.
An irony of investing is that the more you understand complex strategies, the clearer it is that they are unnecessary and often drain wealth. Simple strategies survive. Just in time for Thanksgiving, the Wall Street Journal shared the investing equivalent of the turkey living in bliss until the farmer came for them. Thinking there had to be a better way, these investors enjoyed good non-stock market returns from trading commodity options, some for years. Last week a spike in natural gas not only wiped out their accounts, but left many owing more money than they paid in. They had been selling naked calls and got caught with their pants down. The aspirational allure of trading options overrode the red flags that common sense should have brought up. Common sense is not so common.
We understand that you are being barraged with pitches on everything from mutual funds to hedge funds to salmon farms. We are, too. Like you, when we meet with our peers there’s always that one guy who just invested in Brazilian farmland (ok, that was Harvard) and can’t wait to humble-brag about it. I’ve found that the pitches are more numerous when equity markets are down. The pitches get weirder when markets are sideways (horror movies, catastrophe bonds, Andean cacao).
Sellers of financial products are incentivized to get you to DO SOMETHING whether it’s in your best interest or not. A fiduciary recognizes the harm that unnecessary activity brings.
It’s difficult to maintain a common sense outlook when you see people getting rewarded for taking on outsized risk. A burst of volatility in a relatively obscure asset class roasted the turkeys above. Larger drawdowns in the overall markets will help reset a healthy risk appetite for the rest of us.
What’s the Point?
Everyone has their own set of financial goals and we are here to facilitate their achievement through expert guidance while providing peace of mind. Rest assured that we are monitoring the markets. The reason we are not trading like crazy is that we don’t need to.
Clients that have been with us for over ten years have seen how we react in a true financial disaster. Portfolios were rebalanced, losses were harvested, and while we were reachable by phone or email, we did our best to reach out to clients first. There was certainly a heightened sense of urgency, but not panic.
The drawdowns of 2018 are not the systemic risks of the Financial Crisis. Drawdowns are normal, as are recessions. The economy normally experiences two recessions per decade. Continued sleepy prosperity would be more unusual than a recession or market correction. We don’t make predictions about what the market will do. We do position portfolios to take advantage of market volatility. However, economic turbulence doesn’t seem to be close. Unemployment is extremely low, wages are growing, and the economy has broken out of the 2% doldrums.
In times of increased market volatility, it is a good idea to revisit the role of cash. Keeping enough cash on hand to meet a couple of years of expenses allows the invested portfolio to outlast temporary turmoil and reduces the temptation to time the market.
Ideally, investors rebalance their portfolios as the market moves up and down, but the last few corrections often didn’t last long enough to harvest meaningful losses or rebalancing. The market bounced back too quickly which is a good thing. So why does it feel so bad? As short as it was, seeing even paper losses felt worse than the gains. Gains are uncelebrated. Losses are shouted from the rooftops. Even though the S&P 500 hit all-time highs in September, the memory of the market correction earlier in the year lingered like a bad hangover.
The market historically experiences a drawdown of 14% each calendar year. While there are no strict rules regarding negative market nomenclature, a 20% drop is generally understood to be a bear market. A 10% drop is a correction.
This year, the S&P 500 had a correction of 10.1% which ended in February.
The latest drawdown doesn’t earn the ‘correction’ moniker as the market was down 9.76% from its peak.
Since the S&P 500’s all-time high on September 20th, whether you weight the index by market capitalization, equal weight it, or reverse market cap weight it, the index is down about the same amount. This is not a FAANG-led downturn.
The S&P 500 is down 9.76% from its peak, but Year-to-Date, it’s up 0.53%. Flat for the year isn’t something to brag about, but it’s far from the disaster the financial entertainers on TV are barking about.