As I write this as if the fears of the Corona virus are not enough, a compounding effect of sudden drop in oil due to challenges with Saudi Arabia and Russia have added to sell-off of stocks and what can be deemed panic. There are several things I want to share with you in addition to the commentary of Nick Murray to add perspective that we share:
(1) I was reminded of the emotions that took place back in 2007-09. I had a client that said, “You must be panicked right now.” during a period of extreme volatility. My response would be appropriate now, “We are concerned but we don’t feel it is productive to panic. Rarely do any of us make good decisions when we panic.” If you are a fan of Rudyard Kipling’s poem, If, you will recognize the title of this email: If you can keep your head when all about you are losing yours. I always loved that poem and that reminds me of what Ernest Hemingway would call grace under pressure. Top performers believe that. We are definitely concerned but recommend not panicking.
(2) Paul and I are big fans of a guy named Ray Dalio who is a hedge fund manager. He has said that meditation has been a key to his investment success. A big component of that is breathing which helps one stay calm during stressful times.
(3) When markets drop quickly, our minds are predisposed to thinking extremely negative and it is easy to say, “I am going to lose everything.” Negative thinking is part of our DNA. From evolution standpoint, it has kept us alive when saber tooth tigers were out there. I was just listening to performance coach, Trevor Moawad. He coaches top athletes. He said something profound. When we think negatively, it has 10x times the emotional impact. He doesn’t necessarily advocate positive thinking but trying to avoid negative thinking. When we think of the markets, we have to remember that stocks and bonds are based on the underlying values of companies and in case of bonds, governments. As Nick Murray points out below, we have to keep the perspective that the underlying values will not all drop to zero.
(4) Finally, we at Harford Financial Group are not ultra aggressive financial advisors. We are not pedal to the metal kind of advisors. We tend to error on the side of balanced to conservative because we know that the majority of our best clients have that mindset and to paraphrase the Eagles don’t live life in the fast lane. Most of our clients have a good balance between stocks and bonds. As we focus on retirement income, the portion in stocks is not earmarked to be spent for at least 10 to 20 years which gives time for recovery. Put in another way, your more short term spending needs should be funded with cash and bonds and the stock portion is for longer term goals. Aggregate bonds are positive year to date. For instance in 2008/09, it took four and half years for the stock market to come back to its previous level. Someone in retirement could sustain that if they were balanced and had ample allocation to bonds and cash to weather that storm.
Today – March 9 – is the tenth anniversary of the crescendo of global panic that marked the bottom of the bear market of 2007-09.
It is to me a thing of the most wonderful irony that the world has elected to celebrate this iconic anniversary with – you guessed it – another epic global panic attack.
At this morning’s opening level of 2,764, the S&P 500 is down over 18% from its all-time high, recorded on February 19. Declines of that magnitude are fairly common occurrences – indeed the average annual drawdown from a peak to a trough since 1980 is close to 14%.* But such a decline in barely a month is noteworthy, not for its depth but for its suddenness.
As we all know by now, the precipitants of this decline have been (a) the outbreak of a new strain of virus, the extent of which can’t be predicted, (b) the economic impact of that outbreak, which is equally unknown, and (c) most recently, the onset of a price war in oil. (That last one is surely a problem for everyone involved in the production of oil, but it’s a boon to those of us who consume it.)
The common thread here is unknowability: we simply don’t know where, when or how these phenomena will play out. And in my experience, the thing in this world that markets hate and fear the most is uncertainty. We have no control over the uncertainty; we can and should have perfect control over how we respond to it.
Or, ideally, how we don’t respond. Because the last thing in the world that long-term, goal-focused investors like us do when the whole world is selling is – you guessed it again – sell. Indeed, I welcome your inquiries around the issue of putting cash to work along in here.
On March 3, the erudite billionaire investor Howard Marks wrote, “It would be a lot to accept that the US business world – and the cash flows it will produce in the future – are worth 13% less today than they were on February 19.” How much more true this observation must be a week later, when they’re down 18%.
Be of good cheer. This too shall pass. We hope these perspectives help. The psychology and managing our emotions are the key thing in all of this. We are here to listen and be that sounding board for you during these times.
Sincerely,
Harford Financial Group