“SHOW ME MY SILVER LINING” – First Aid Kit
Jim Shellenberger, CFA | Financial Advisor
There is much to unpack in the investment world from the last month or so. Everyone is looking for a reason behind the chaos and a silver lining in all the news. First, it all started with fears of COVID-19 when it no longer seemed to be contained, and cases began to appear across the US. The Fed did nothing to help confidence when they unexpectedly cut Fed fund rates by 0.50%. Just as things started to seem like they were going to settle down, Saudi Arabia and Russia added turmoil to the oil market. Saudi Arabia purposely added a surplus supply of oil to an already oversupplied market in an attempt to strong-arm Russia into signing the OPEC (Organization of Petroleum Exporting Countries) deal out of which they previously backed out, at the last minute. All of this has created some fear in the market. I believe that journalistic sensationalism, especially in regard to dramatized click-bait headlines that deliver polar opposite messages, has done far more harm than good. In moments like this, when headlines are feeding us negative news, it is often beneficial to remember some basic concepts about investing.
1. This is not the first time we have seen equities go down
We have all heard that more times than we can count, and though it doesn’t really seem to help in moments like this, we’re going to break it down in a different manner.
Source: Morningstar
In the chart above, the line in blue is the total market return of the S&P 500® from September 11, 1989, to February 28, 2020. The total return for the S&P 500 was about 1,520%. Now turn your attention to the bottom half of the picture with all the red. The red represents a drawdown graph in which the S&P 500was down from its high-water mark (or its highest value to date). Over this time period, the S&P 500 was down 10% or more from its highest valuation for about 30% of the time. The incredible part about this is that the S&P 500 returned about 1,520% despite being down 10% or more from its highest valuation for almost 1/3 of the time. 1,520% is a nice return, but it was not a smooth ride getting there.
2. All out and all in strategies very rarely work
When fear sets in, people want to pull out of the market to sit in cash. The problem is that if you got lucky and pulled your money out at the “perfect time”, when do you get back in? There ‘won’t be a clear alignment of the stars saying now is the time. Let us look at the last financial crisis. March 9, of 2009 was the bottom of the financial crisis. Headlines were not favorable and not indicating the market was about to turn around. For example, around this day, General Motors announced they were on the brink of bankruptcy.1 By May 1, the S&P 500 was already up 30% since March 9. By June 1, it was up 40%. On that day General Motors filed for bankruptcy, demonstrating that even though the S&P 500 was up 40% from its low, news still was not great. By the end of the year, the S&P 500 ended up 67% from that March 9th date. Everyone has 20/20 hindsight vision, but it was extremely difficult to know the bottom of the market was March 9 when news, events, and economic indicators were still not optimistic. If you had been sitting in cash not knowing when to invest, you could have missed some amazing months of returns. We have repeatedly seen “time in the market beat timing the market”.
3. Beware of Headlines
Since the S&P 500 is one of the most popular indices in the world, news primarily focuses on it when reporting. This is not a bad thing, but we all need to remember that–most of the time–our portfolios hold a more diverse selection than just US large stocks. This means that, hopefully, our portfolios do not reflect what you see on the TV during times of turmoil. For example, a 60/40 portfolio is a popular investment strategy for a moderate risk level. This means it targets 60% stocks and 40% bonds. If we look at drawdowns in the last two decades, you will notice that a simple diversification like a 60/40 portfolio gives you different returns than what you see on the news. If we use the S&P 500® for the 60% stock allocation and Barclays Aggregate Bond for the 40% bond allocation, we can see the difference below:
All calculations of performance by Elevate Asset Management. Source: Morningstar
Understandably, negative numbers are never ideal to see, but they are going to happen. We can all wish the financial journey was a smooth, straight line up, but that is not the reality of investing. Regardless of how far we see this drawdown end up, in order to be most successful over the long haul, you must be willing to lose over the short-term. At Frontier, we have a Downside First Focus when it comes to the investment process all the way from manager due diligence, to asset allocation, to building the strategies. We strive to be cognitive of those short-term losses and attempt to soften the blow. We understand that when the market goes down, it is scary, and people want to be invested in a way that attempts to minimize that pain. Just remember that during market downturns, it may feel like they may never end, but when you look at the line graph above, you see that they end up being buying opportunities.
Things listed here are not revolutionary, but they are good to hear amidst all the negative talk in the news that inevitably instill fear into us. Remember not to get drawn in emotionally during moments like this. If you need to talk about your thoughts or to hear other ideas, please give me a call. I especially want to urge you to give me a call before you make any drastic changes during times like this. It is my job to help contain fears and keep people from doing what might feel like a relief but could end up being a hindrance in the long-term. The bad news is we are always going to experience downturns and drawdowns in the market. The silver lining is it has happened before, and–just like the example above–it may be a turbulent ride, but with a long-term perspective and focus, the market has gone up.
- “March 9, 2009: The Day Stocks Bottomed Out.” Forbes, Forbes Magazine, 11 July 2012, www.forbes.com/2010/03/06/march-bear-market-low-personal-finance-march-2009.html.
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In reviewing the performance information presented here, we recommend that you consider both the returns generated and the level of risk that was assumed in generating those results. We believe that performance information cannot be properly assessed without understanding the amount of risk that was taken in delivering that performance. The performance information presented here covers different time periods. We present performance information for short time periods because we understand that clients and potential Investors are interested in this information, however, we recommend against making any investment decisions based on short-term performance information. For any investment products mentioned herein, a complete description of their investment objectives, along with details of the risks and fees involved is contained in their respective prospectus and statement of additional information, which is available on their websites and should be read fully.
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| INDEX | INDEX DESCRIPTION |
| S&P 500 | Represents U.S. large company stocks. It is a market-value-weighted index of 500 stocks that are traded on the NYSE, AMEX, and NASDAQ |
| Barclays US Aggregate Bond | Measures the performance of the U.S. investment grade bonds market. The securities must have at least one year remaining to maturity, must be denominated in U.S. dollars and must be fixed rate, nonconvertible and taxable. |
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