Control the things you can control. Make sure you plan for the worst and hope for the best and try to have living expenses covered in emergency savings.
“It’s been a long time since I walked through this old town”-Kenny Rogers
Jim Shellenberger, CFA | Financial Advisor
I wanted to find a quote from Kenny Rogers’ to honor him as he recently passed away. One quote I have heard in honor of him notes that he genuinely knew “when to fold ’em” by going out in the middle of a pandemic. Words from his song “It’s been a long time since I walked through this old town,” may seem like a theatric over-exaggeration of the current situation but could hit close to home for others. We are in unprecedented times right now as many citizens of the world are quarantined, trying to stay sane and keep moving forward. The financial markets have been memorable as well. US bond yields hit all-time lows while the Dow Jones Industrial Average® had two top-five most substantial single-day percentage losses and one top five most substantial single-day percentage gains in history. It was a volatile month. We saw the S&P 500® go down about 34% from its all-time high in just about four and a half weeks. The average bear market drawdown is about the same percentage but usually takes roughly one and a half years to get there. A lot of valuable information will be coming out this month. People will be looking at economic numbers from the first quarter, for March, first-quarter earnings and news about COVID-19 to see if there is any light at the end of the tunnel. It wouldn’t be surprising to see volatility stay high during April. With that in mind, what are some important things to remember for these coming weeks?
“Cash is King” It is crucial in times of uncertainty to prepare for the worse and hope for the best. During times like this, it is imperative to understand your monthly expenses. How much money do you need to live each month? Once you know that number, you want to have 3-6 months or 6-12 months of emergency savings depending on your job or income stream. Given the situation, it is probably safer to err on the side of caution. If you are working, prepare as if your hours will be cut or you may lose your job. As I said, prepare for the worst. Additionally, as you dig through your expenses, find costs that you can cut out. The time in quarantine is an excellent opportunity to see where your money is going and if it makes sense for you and your finances.
When to invest if you have extra cash? This is the golden question that the entire world is trying to figure out. If I asked, “are you more afraid of the market going down from here or missing the upside,” you would probably respond by saying both. Understandably so. Unfortunately, nailing the exact bottom of a downturn is mostly luck. If you look at the history of some of the greatest investors, they themselves have not nailed the bottom. There was a quote from Warren Buffett floating around regarding the 2008 financial crisis about how in the near-term, things will get worse, and headlines will be scary, so in return, he has been buying stocks. When he said this, the S&P 500® ended up going down a further 30% or so.1 If you can’t nail the bottom, what do you do? One solution is to Dollar Cost Average (DCA). Your 401(k) is a great example of DCA. You have an amount of cash going to investments each month. During times like we are currently in, if you have taken care of emergency savings, excess cash flow should be going to investments. Also, if you have cash savings, you have been waiting to invest, it may be beneficial to invest a portion of it every few weeks or monthly. If you had put in an equal amount of money at the beginning of each month from June 2008 to December 2009 into the S&P 500®, your cumulative return up to March 31, 2020, would have been about 230%. In the short term, you may feel pain if stocks continue to fall further, and you may experience pain if stocks have already hit bottom but stay focused on the long-term. Taking a DCA approach can help take out the emotion and speculation and puts process and plan into place.
What will happen next? The word to describe this pandemic should be uncertainty. There is the uncertainty of the effects of COVID-19 and how long it will last. There is the uncertainty of the impact on the markets being shut down and how society will change as we come out of it. In the short-term, it is unknown what will happen. There are underlying factors that are encouraging and some that are not. The stock market could go back down to the previous low, and even further, it could bounce around at this current level, and it could go up. Unfortunately, we are at the mercy of uncertainty. Ultimately, this may be a great buying and rebalancing opportunity. It could be a turbulent ride, but its best to focus on the long-term. One way to help stay focused on the long-term is not to check your investments daily or often. Behavioral finance has helped reveal that those that invest and check their account less regularly are more likely to not succumb to irrational behavioral actions that can affect their investment portfolio. Remember why you are investing, and don’t let short-term fluctuations distract you from that goal.
Frontier’s Role. At Frontier, we have been staying busy. We still adhere to our Downside First Focus philosophy. Knowing that stocks could go down again, we strive to be aware 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. Take into consideration that during market downturns, it may feel like they may never end, but remember that they may end up being buying opportunities. At Frontier, we have been looking at asset allocation and our strategies almost daily. We are closely watching the markets and making sure to follow our process. We want to make sure we let fundamentals and processes lead us and not emotion and speculation. If you ever have any questions about how our process works during times like this, please let me know so we can have a conversation to go over the details.
It is an interesting time in history right now. We have endured a few weeks of unprecedented social distancing and continue to wonder how much longer this will last. Control the things you can control. Make sure you plan for the worst and hope for the best and try to have living expenses covered in emergency savings. We aren’t sure what will happen in the next couple of days or weeks, but don’t let the uncertainty strike fear, rather lean into it and remember your long-term reasons for investing. We will make it through this eventually, so stay optimistic while being prepared. Make sure to care for your mental, financial, and physical health during all of this. We will make it to the end, and we will be able to “walk through this old town” again.
1 Carlson, Ben. “Even Warren Buffett Can’t Nail the Bottom.” A Wealth of Common Sense, 30 Mar. 2020, awealthofcommonsense.com/2020/03/even-warren-buffett-cant-nail-the-bottom/.
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