For those who follow my blog, you have probably noticed a number of recurring themes. Spend less, save more is certainly one of them. That effective investing requires both offensive and defensive strategies, simultaneously, is another. Diversify among and within asset classes, as that is our best, yet imperfect, defense against the unknown. Of all the themes I have discussed, I believe my favorite is, prevention is more valuable than cure.
Forgive me for stating what is now obvious: The ideal time to begin moving money out of equities (stocks) was over the past couple of years with the stock market at or near all-time highs. This is especially true if you were nearing retirement or already retired. Unfortunately, because of how robust the stock market had been, compared with the anemic yields of most fixed income, many individuals were simply of the mind to “let it ride.”
As of this writing the S&P 500 is down about 30% from its recent peak in February. Where it will go from here is anyone’s guess.
Lots of people have been selling stocks and stock based mutual funds, which is why the market is down, and some percentage of those people have likely sold everything. This indicates, at some level, that they believe the market will go lower still.
Others instinctively stay the course and dig in for what could be a tough slog ahead. They have seen this before in 2008 and 2000 and perhaps even 1987. Though they do not like it any better than the rest of us, they will tighten their belts and tough it out. That is what they do.
A third, spirited and intrepid group, looks at significant market declines as an opportunity to buy value and benefit from what they believe will be the inevitable rebound. History leads me to believe that they will be right, at some point. I want to emphasize here the phrase at some point.
Theoretically, all of these strategies have merit. I would also add that everyone’s circumstances are different and must be evaluated on that basis. Each of us must make the difficult decisions we feel are best for us, based on our unique circumstances.
That said, I have a clear preference. I believe that buying on significant dips is the best long-term strategy, holding is second best and selling after the decline, is the least attractive of the three paths forward. Keep in mind that the stock market may very well go down substantially from where we are now. The idea is not to pick a bottom but to search out value at prices we believe represent a good purchase point.
First and obviously, selling is the opposite of buying. If buying during significant market corrections has been a good strategy historically, as it has undeniably been, then selling must by logical extension be a poor one.
The main reason it has been a poor strategy during market declines should be examined and understood. If we sell today, it is entirely possible, though not at all certain, the market will decline further. For the sake of this discussion, let’s assume that stocks will keep falling from current levels.
If we sell our assets now and their value continues to decline, that will mean we did the right thing, right? The true answer is, maybe. Maybe it is the right thing.
For most people who are selling, they are telling themselves that their strategy is to sell now and buy back at a lower level. Therefore, for this course to pay off, they must get back in at some point. That is when things can and often do get tricky.
Think about it. If we knew this correction was coming, we would have sold everything in February. We did not know, because we could not know exactly when it would come, so most people did not sell everything. Some folks, if not most, did not sell anything.
Even though many investors were not selling before the crash, they might tell themselves they will know when to get back in before the rebound. But how logical is this, given that we did not know exactly when the crash was coming? If we could not predict the precise moment of the crash, why would we be able to guess the moment before the market begins to rally?
I believe we tell ourselves this because we are fearful and feel that moving into cash will make us less anxious in the short term. Not because we have thought it through and believe it is the best course of action in the long term.
Covid-19 and oil prices are not the only forces at work in the world. They are simply, and understandably, the ones we are focused on at the moment. As I write, science and medicine are working toward effective treatments and eventually, a vaccine for the virus.
Middle Eastern countries can produce a barrel of oil far more cheaply than we can in the West. To hurt their competition, perhaps they are willing to make a smaller profit or even lose money, selling around $30 a barrel. Even if they can sell their oil at that price, that doesn’t mean that they want to. Do not be shocked if prices begin to creep higher before very long.
In the meantime, a discounted, well-greased market with low rates, Federal Reserve driven liquidity, powerful fiscal stimulus and lower gas prices could move toward recovery faster than battle weary investors will be able to anticipate.
The best way to design a portfolio is by diversifying among assets classes and within them. Prevention is more valuable than cure.
If it seems too late for prevention, it might be a good idea to stay the course and, if appropriate, buy on the dips. And, diversify, diversify, diversify! The best time to plant a tree was 20 years ago. The second best time is today.
Consider working with a financial planner you trust to navigate the current crisis and to implement a prevention plan for those that will inevitably follow.
Scott R. McGimpsey March 31st, 2020
This material was prepared by Scott McGimpsey and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Neither Cetera Advisor Networks LLC nor Scott McGimpsey is engaged in rendering legal, accounting, or other professionally services. If such assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any federal, state, or municipal tax penalty. Moreover, a diversified portfolio does not assure a profit or assure protection against loss in a declining market. UNIFIED PLANNING GROUP is an independent firm. Securities offered through Cetera Advisor Networks LLC, Member FINRA/SIPC. Advisory services offered through Summit Financial Group, Inc., a Registered Investment Advisor. Summit and Cetera are affiliated and under separate ownership from any other named entity.