Mar 16, 2020 Current Situation

Current Situation

The spread of the coronavirus (COVID-19) is impacting not just lives but also the financial markets. While much is unknown at this moment, there is one thing we can be fairly sure of: it’s not the last crisis we’ll ever face. Stocks have faced many crises from wars to impeachment to banking crises and throughout it all, they have carried on. This too shall pass.

As of this writing the Dow Jones Industrial Average is down 19% from it’s all-time highs reached just 18 trading sessions ago (February 12th) [i]. If stocks fall an additional 1%, it will be the fastest all-time high to 20% decline in U.S. history [ii].

 

 

What Past Market Declines Can Teach Us

Keeping a long-term perspective is always important, but it’s essential when markets are volatile and emotions are running high. A look at history shows that while markets react to news events in the short term, they have tended to reward patient investors over long periods of time.

There is no way to gauge the coronavirus’s effect on economic activity with any kind of precision. The natural approach to analyzing an event like this is to look to past analogues. Fortunately, there have been few similar events in recent times. Global markets have shrugged off the impact of past viral outbreaks. While the past is not predictive of the future, it does offer valuable perspective.

Looking back at data since 1949 shows that stock market declines have varied widely in intensity, length and frequency but downturns don’t last forever.

Market corrections of 10% are surprisingly common and have happened on average once per year. Larger corrections of 15% or more, like the one we are currently experiencing, occurred about once every four to six years.

Is this the start of a bear market?

Unfortunately, it is impossible to tell if this will turn into a large and prolonged bear market (defined as periods when the market falls by 20% or more). Historically most corrections haven’t become bear markets. There have been 22 market corrections since November 1974, and only four of them became bear markets (which began in 1980, 1987, 2000 and 2007 ) [iii]. This one may indeed be the fifth.

But what if it really is the start of a bear market?

No bull market runs forever. While bear markets can be scary, they are a part of long-term investing and can be expected to occur periodically throughout every investor’s lifetime.

Since 1949 there have been nine periods of 20%-or-greater declines in the S&P 500. And while the average 33% decline of these cycles can be painful to endure, missing out on part of the average bull market’s 263% return could be even worse.

Bear markets have averaged 14 months, a relatively short time compared with the 71 months of the average bull market — another reason why trying to time investment decisions can be difficult and is usually ill-advised.

Here is what we are currently doing:

  • Rebalancing your portfolio. Volatile times can lead to rebalancing opportunities. Market changes can skew your allocation from its original target. We may rebalance your portfolio by selling positions that have become overweight in relation to the rest of your portfolio and buying positions that have become underweight.
  • Tax Loss Harvesting. Volatile markets can give us good opportunities for tax loss harvesting in taxable accounts. By selling a security that has experienced a loss, you are able to offset taxes on both gains and income. The sold security is replaced by a similar one to maintain an optimal asset allocation.
  • Reinvesting Dividends. We are automatically reinvesting dividends rather than having them go to cash. This way you’ll be buying more shares of your equity investments at lower prices.
  • Stress testing your portfolio. We continually test portfolios to see how their asset mixes hold up in thousands of hypothetical market environments. These “stress tests” verify that the right asset allocation will support your goals, even under the strain of external stress factors.
  • Making sure you have a diversified portfolio. The best approach to protect your portfolio is to diversify among a broad mix of asset classes, including stocks, bonds and alternative investments. We review your portfolio to make sure that each asset class is doing what we expect it to do and that the mix matches your target asset allocation.
  • Avoid jumping in and out of the market. While we do make allocation shifts from time to time, we do not completely jump into and out of the market. Successful market timing is a very inconsistent investment strategy because it requires making two correct decisions: getting out at the right time and getting back in at the right time. It’s easy to look back and say with hindsight that the stock market was overvalued at a particular time and due for a decline. But no one has been able to accurately predict market declines on a consistent basis.

Here are some things you can do right now:

  • Remember that your portfolio is not “the market”. The performance of your diversified portfolio can be very different from the performance of “the market”. It’s likely that your portfolio has a mix of both stocks and bonds and may also be diversified between small cap stocks, non-U.S. stocks and alternative asset classes. “The market” is generally U.S. large cap stocks only and your portfolio is likely to have different performance.
    • The risk-off portion of your portfolio allocation – a combination of bonds, balanced and alternative investments – has done its job since the stock market’s peak by insulating the equity declines. These segments of your allocation are there to play defense for you. We can spend from them if you are taking regular distributions or we can use them as dry powder to rebalance into stocks.
  • Focus on the Long Term. If you’re a long-term investor, resist the urge to make drastic changes to your investment plan in reaction to market moves. Time smooths out market fluctuations, which can help you put any concerns into context. For instance, the S&P 500 Index has experienced double-digit annual losses in 11 of the last 93 years (through 2019) and has only experienced double-digit losses twice over any rolling five-year period. Therefore, for a long-term goal, you can feel more confident holding on to stocks, even if you experience short-term declines [iv].
  • Review your risk tolerance. The risk you take should change as your current situation and life stage change. Market volatility can be a wake-up call to consider adjusting your target asset allocation before a major change in your portfolio.
  • Tune out the noise and trust your asset allocation. Try not to look at your accounts every day or keep the daily changes in context of your longer-term goals. Seeing the same story at the top of every news site you visit, as well as seeing related portfolio fluctuations, is likely to do more harm than good. If you have an asset allocationthat’s based on your goals, risk tolerance, and time frame, you should have confidence in your portfolio’s ability to handle market turbulence. That’s why it’s so important that you have an asset allocation that you can remain committed to, even when markets might appear to be in a free fall.
  • Resist the urge to sell based solely on recent market movements.Making shifts to your portfolio in hopes of avoiding a loss or finding a gain rarely works long-term. Staying the course, while difficult emotionally, may be healthier for your portfolio. Investors who panicked and dumped stock holdings in 2008 and 2009, believing they could get back in when “the coast was clear,” likely suffered equity losses without the benefit of fully participating in the recovery. This doesn’t mean you should hold on blindly, but we suggest considering an investment’s future prospects and the role it plays in your portfolio, rather than being guided by noise and fear.
  • Check up on your spending. For those in the deaccumulation phase, your spending rate can be important to making your money last. There are lots of things out of your control like how long you live, the rate of inflation, taxes and market returns. However, you can control your spending rate.
  • Make volatility work for you by Dollar Cost Averaging. For those in the accumulation phase, saving and investing regularly can be important to your long-term financial goals. If you invest regularly, you’re putting the market’s natural volatility to work for you. Buying a fixed dollar amount on a regular schedule offers opportunities to buy low during market dips. Over time, regular contributions can help reduce the average price you pay for your fund shares [v].
  • Look at refinancing debt. Interest rates, including mortgage rates, have fallen to all-time lows. You could potentially save thousands of dollars by taking advantage of the low interest rate environment by refinancing your mortgage.

We realize it’s easy to say volatility and market dips work themselves out over time, but we realize it’s much harder to live through. It can be incredibly difficult to watch your portfolio decrease, no matter how much of a buying opportunity it presents.

Please contact your advisor if you would like to review the volatility of your portfolio.

 

 

[i] Yahoo! Finance. Calculations by Leonard Rickey Investment Advisors.

[ii] Source: Michael Batnick, Bloomberg

[iii] Schwab: “Market Correction: What does it mean?” Each period listed represents the beginning month/year of either a market corrections or bear market. The general definition of a market correction is a market decline that is more than 10% but less than 20%. A bear market is usually defined as a decline of 20% or greater. The market is represented by the S&P 500 Index.

[iv] Past performance cannot guarantee future results. It is not possible to invest directly in an index.

[v] Dollar-cost averaging does not guarantee that your investments will make a profit, nor does it protect you against losses when stock or bond prices are falling. You should consider whether you would be willing to continue investing during a long downturn in the market, because dollar-cost averaging involves making continuous investments regardless of fluctuating price levels.

 

IMPORTANT DISCLOSURES

Leonard Rickey Investment Advisors, PLLC (“LRIA”), is an SEC registered investment adviser located in the State of Washington. Registration does not imply a certain level of skill or training. For information pertaining to the registration status of LRIA, please contact LRIA or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov).

This newsletter is provided for general information only and contains information that is not suitable for everyone. As such, nothing herein should be construed as the provision of specific investment advice or recommendations for any individual.  To determine which investments may be appropriate for you, consult your financial advisor prior to investing. All performance referenced herein is historical in nature and is not an indication of or a guarantee of future results. All indices are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

Your experience may vary according to your individual circumstances and there can be no assurance that LRIA will be able to achieve similar results for all clients in comparable situations or that any particular strategy or investment will prove profitable.   As investment returns, inflation, taxes and other economic conditions vary, your actual results may vary significantly. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. There is no guarantee that the views and opinions expressed herein will come to pass. This newsletter contains information derived from third party sources. Although we believe these third party sources to be reliable, we make no representations as to the accuracy or completeness of any information prepared by any unaffiliated third party incorporated herein, and take no responsibility therefore.

Stock investing includes numerous specific risks including the fluctuations of dividend, loss of principal, and potential illiquidity of the investment in a falling market. International and emerging markets investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. Small cap stocks may be subject to a higher degree of risk than more established companies’ securities. The illiquidity of the small cap market may adversely affect the value of these investments. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. This newsletter should not be regarded as a complete analysis of the subjects discussed. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise and bonds are subject to availability and change in price. The risks associated with investment-grade corporate bonds are considered significantly higher than those associated with first-class government bonds. The difference between rates for first-class government bonds and investment-grade bonds is called investment-grade spread. The range of this spread is an indicator of the market’s belief in the stability of the economy. The fast price swings in commodities and currencies can result in significant volatility in an investor’s holdings. There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes. The Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time.

Any projections, forecasts and estimates, including without limitation any statement using “expect” or “believe” or any variation of either term or a similar term, contained here are forward-looking statements and are based upon certain current assumptions, beliefs and expectations that LRIA considers reasonable or that the applicable third parties have identified as such. Forward-looking statements are necessarily speculative in nature, and it can be expected that some or all of the assumptions or beliefs underlying the forward-looking statements will not materialize or will vary significantly from actual results or outcomes. Some important factors that could cause actual results or outcomes to differ materially from those in any forward-looking statements include, among others, changes in interest rates and general economic conditions in the U.S. and globally, changes in the liquidity available in the market, change and volatility in the value of the U.S. dollar, market volatility and distressed credit markets, and other market, financial or legal uncertainties. Consequently, the inclusion of forward-looking statements herein should not be regarded as a representation by LRIA or any other person or entity of the outcomes or results that will be achieved by following any recommendations contained herein. While the forward-looking statements here reflect estimates, expectations and beliefs, they are not guarantees of future performance or outcomes. LRIA has no obligation to update or otherwise revise any forward-looking statements, including any revisions to reflect changes in economic conditions or other circumstances arising after the date hereof or to reflect the occurrence of events (whether anticipated or unanticipated), even if the underlying assumptions do not come to fruition. Opinions expressed herein are subject to change without notice and do not necessarily take into account the particular investment objectives, financial situations, or particular needs of all investors. For additional information about LRIA, including fees and services, please contact us for our Form ADV disclosure brochure using our contact information herein. Please read the disclosure brochure carefully before you invest or send money.

INDEX DEFINITIONS

The Dow Jones Industrial Average (DJIA) is an index that tracks 30 large, publicly-owned companies trading on the New York Stock Exchange (NYSE) and the NASDAQ.

The MSCI ACWI is a market capitalization weighted index designed to provide a broad measure of equity-market performance throughout the world. The MSCI ACWI is maintained by Morgan Stanley Capital International (MSCI) and is comprised of stocks from 23 developed countries and 24 emerging markets.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. It cannot be invested into directly.

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Important Disclosures

Leonard Rickey Investment Advisors, PLLC (“LRIA”), is an SEC registered investment adviser located in the State of Washington. Registration does not imply a certain level of skill or training. For information pertaining to the registration status of LRIA, please contact LRIA or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov).

This is provided for general information only and contains information that is not suitable for everyone. As such, nothing herein should be construed as the provision of specific investment advice or recommendations for any individual. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. There is no guarantee that the views and opinions expressed herein will come to pass. This newsletter contains information derived from third party sources. Although we believe these third-party sources to be reliable, we make no representations as to the accuracy or completeness of any information prepared by any unaffiliated third party incorporated herein and take no responsibility therefore.

Any projections, forecasts and estimates, including without limitation any statement using “expect” or “believe” or any variation of either term or a similar term, contained here are forward-looking statements and are based upon certain current assumptions, beliefs and expectations that LRIA considers reasonable or that the applicable third parties have identified as such. Forward-looking statements are necessarily speculative in nature, and it can be expected that some or all of the assumptions or beliefs underlying the forward-looking statements will not materialize or will vary significantly from actual results or outcomes. Some important factors that could cause actual results or outcomes to differ materially from those in any forward-looking statements include, among others, changes in interest rates and general economic conditions in the U.S. and globally, changes in the liquidity available in the market, change and volatility in the value of the U.S. dollar, market volatility and distressed credit markets, and other market, financial or legal uncertainties. Consequently, the inclusion of forward-looking statements herein should not be regarded as a representation by LRIA or any other person or entity of the outcomes or results that will be achieved by following any recommendations contained herein. While the forward-looking statements here reflect estimates, expectations and beliefs, they are not guarantees of future performance or outcomes. LRIA has no obligation to update or otherwise revise any forward-looking statements, including any revisions to reflect changes in economic conditions or other circumstances arising after the date hereof or to reflect the occurrence of events (whether anticipated or unanticipated), even if the underlying assumptions do not come to fruition. Opinions expressed herein are subject to change without notice and do not necessarily take into account the particular investment objectives, financial situations, or particular needs of all investors.

For additional information about LRIA, including fees and services, please contact us for our Form ADV disclosure brochure using our contact information herein. Please read the disclosure brochure carefully before you invest or send money.