“The World Only Ends Once”
My thoughts on COVID-19
This is a scary time in the world. We are facing a global pandemic. Borders are closing. Markets have fallen. The economy is at a standstill as people have stopped going to work—however, this not the end of the world. The economy and markets will come back in time. This is the time when people need advice more than ever.
Welcome to the time of COVID-19, or the coronavirus. Before I start discussing the financial ramifications of the virus on the market, I want to say PLEASE HEED THE WARNINGS of the CDC and the public health officials and make sure that you and your family are taken care of. Follow all necessary precautions and only leave your house when necessary. If you do not have anyone to assist you with basic tasks, please contact our office and we will try to help.
When I look at the financial markets today, my single most important piece of advice is that this is not the time to hide or panic. This is the time to make informed, educated investment decisions. This is when fortunes are won and lost. A year from now, the world will have normalized. Life will move on and people will get back to work. Unless you believe that this virus will fundamentally change business in the United States, there is no need to panic and sell your portfolio. When this virus subsides, there will be a McDonalds. There will be a Starbucks. There will be a Walmart, Amazon, Apple, etc. Life will go on and business will resume.
The major mistake investors make during times of economic duress is to sell and go to cash AFTER the drop, and miss when markets rebound. Do NOT make the mistake of panicking and believing that the current situation will last forever. In general, the average person does not truly understand what they are invested in, what a stock is, and what it represents. They just look at their account statements and think (very rationally) that the account value went down, and they do not want it to continue to do so. Without understanding what is happening, some investors sell in order to preserve what they still have. Fear is the one of the major reasons that investors sell their investments at the bottom – even though rationally they know this represents the best opportunity. We are taught the adage “buy low and sell high”. Then why do we seem programmed to buy high and sell low?
The truth is that today’s account value does not matter. Not at all. Unless you plan on or need to sell. In this sense, think of your home. You buy it. You occasionally think about what it is worth and imagine what you would do with the profits if you sold it. However, the value is irrelevant as long as you are living in the home. It’s the same home whether the market says it’s worth $100,000 or $1,000,000. The value only matters the day that you buy the house and the day that you sell it. You would not sell it in a panic over a virus.
It is the same when you buy a stock. Most people think of a stock as an imaginary investment that goes up and down. Think of buying a stock as what it truly is, buying a business. You buy a tiny part, or “share”, of a business. As the business makes money, you take a share in the profits (dividends), and ultimately hope that the company is successful and becomes more and more valuable. Whether the stock goes up or down, you still own the same share of the same business. Providing it is operating smoothly, it will continue to pay dividends and grow. The price does not matter until it is time to sell. You don’t sell BECAUSE of the price. You don’t panic because the value goes down. You evaluate the business to make sure that it is doing what you expected it to do when you bought it, but you don’t sell just because everybody else is. Just like you wouldn’t sell and move out of your house because the price went down, or because your neighbors sold their home.
Continuing with the home analogy, imagine if someone knocked on your door every day and offered you a certain price for your house. You would be excited when they offered you a high price. You would feel bad when they didn’t. Quite frankly the emotions and illusion of making and losing money would drive you nuts. But the truth is, if you weren’t selling, it wouldn’t matter. It is the same with investing. The major difference in homes and investments is that the guy knocking on the door of your home is instead the 24-hour news cycle and stock quotes. If you aren’t selling, ignore them. They don’t matter any more than someone trying to buy your house when you are not selling.
Now, let’s discuss the virus’s impact itself. It’s bad. It’s going to be bad for a few months. Businesses will lose money; some may declare bankruptcy and the US economy will temporarily shrink. However, the economy will recover. People will return to work. Life will go on. There will be winners and there will be losers. However, the current fear will eventually subside. Prices and account values will rebound. The earth will continue to revolve around the sun. Moreover, when the market turns, it will likely be quick. Waiting on the sideline could be a costly missed opportunity. Like many investors sell at the bottom, those same investors often wait too long and tend to start investing again near the top.
The speed of the recovery will depend on how long this scare lasts. If it is a month or less, there will be modest damage to the economy – especially given the government stimulus efforts. Some smaller restaurants and businesses may close. Some large ones may be in trouble, but almost all will make it through. The strong will survive. Afterwards, there will be a lot of pent up demand. People will want to go out again and spend money. I predict that the shorter the scare lasts, the quicker the economy will recover.
If the virus scare lingers through the summer and the shutdown extends for months, many small businesses will close. Many people will be unemployed. Some larger businesses won’t make it. Ultimately, the economy will still rebound, but it will take longer to recover. It could be a few years before we reach our all-time high again.
Either way, if you are not relying on your principal to survive, it doesn’t matter how long it takes. The value of your account, although it feels good when it is high, doesn’t matter. What does matter is the income that you need, the income that your account produces, and that the underlying investment will grow and continue to produce this income as long as you need it.
What is driving all of this fear of loss? Investors fear that they will lose all their money in a market downturn. This is the reason that we build diversified portfolios. If you are invested in one or two stocks, losing everything is a realistic possibility. For example, GM filed bankruptcy in 2009. GM still exists, but if you owned shares in GM prior to 2009 you would have lost all of your money. That is risky. That risk can be managed and effectively eliminated through diversification. In a well-managed, diversified portfolio, that fear is irrational. For example on the day that GM filed for bankruptcy, the S&P 500 Index opened at 920.82 (July 1, 2009). Even after the recent market carnage, the S&P 500 closed at 2409.39 on 3/19/2020. In other words, even after the recent crash, as of 3/19/2020 the gain of the S&P index was 161%, and that does not include dividends! Put into perspective, the stock market, with all its risk and “crashes” constantly seen on television, doesn’t seem so bad. 1
Looking back 11 years later, 2009 was a generational investing opportunity. My belief is that 2020 will also be a generational investment opportunity. I won’t say that things cannot get worse from here. This may not be the bottom. I will say, in my opinion, we are a lot closer to the bottom than we are to the top. My belief is that 11 years from now we will look back and be thankful that we had a plan and did not sell our investments in a panic.
This perfectly illustrates our strategy at Vault. Buy a diversified portfolio. Make adjustments as necessary, but never out of panic. Understand what you are invested in. We work with you to develop an investment philosophy. We determine how much “risk” you want to take and try to explain to you what that means. We discuss what happens during crashes and try to anticipate how you will feel. We develop a plan for what to do when you feel as anticipated and hopefully stop you from making emotional (aka bad) decisions. We teach you how to systematically buy low and sell high through re-balancing and how to fight your psychological instinct. More importantly, we teach you how to make smart, disciplined investment decisions.
If you have any questions, or would like to talk further, please give our office a call at 561-223-3252. We are happy to talk to you about your concerns and help you better understand what you are currently invested in and what to expect.
Scott Shrader, CFP®, EA
CERTIFIED FINANCIAL PLANNER™
Diversification does not assure or guarantee better performance/profit and cannot eliminate the risk of investment losses in declining markets
All indices are unmanaged and may not be invested into directly.
Investments are subject to market risks including the potential loss of principal invested.
Past performance does not guarantee future results.
These opinions are based on Scott Shrader’s observations and research and are not intended to predict or depict performance of any investment. These views are as of the close of business on 03/19/2020 and are subject to change based on subsequent developments. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. These views should not be construed as a recommendation to buy or sell any securities.
1). Yahoo Finance, March 19, 2020