Articles

Predictably, stocks are down on COVID-19 news. As of close of business Tuesday, February 25, the S&P 500 is down roughly 3% since the beginning of 2020 and down over 6% during the past couple of days. We should expect the volatility to stay with us for some time. The news cycle will release alternating concerning and hopeful stories, sending the market higher and lower.

We build diversified portfolios for exactly these kinds of events. Depending on a client’s tolerance for volatility, we add stable, income generating assets to portfolios that have done well during the recent market turmoil. The net result is that, while stocks are down 6%, our balanced portfolios are down less. When stock returns are high, it is not always easy to understand the rationale for lower-returning bonds. Recently, however, bonds have been doing their job well, reducing volatility in portfolios, and providing opportunities to buy stocks at attractive prices. Times like these remind us why we own bonds.

The investment team at Baker Boyer has been reducing equity exposure in our standard portfolio model for several years, as stock prices, particularly in the US, have climbed. We have been harvesting gains. Proceeds from the equity reductions go to bonds and prepare us well for these types of stock corrections.  Given the economic and market uncertainty of the moment, we are planning some further marginal reductions to equity exposure.

While we are making some adjustments to better position our portfolios for volatility, we continually work with our clients to select asset allocations that suit their ability and willingness to take risk. Asset allocation decisions are made with the client’s financial plan in mind. Nothing we are seeing in markets at present is something that has not been contemplated and stress-tested in our clients’ financial plans. For this reason, we strongly advise all clients to stay invested. The biggest risk for most clients is not a reduction in portfolio balance during a period when stocks sell-off. The biggest risk is when investors sell out of the market to avoid losses, and instead miss the subsequent recovery.

Movements in the market are changes in the collective estimations of future cash flows from companies. The only way we can insure we capture those big “up” days is to remain invested in a balanced portfolio.

History tells us that recoveries tend to come quickly and often when the economic and market environment is still extremely uncertain. This occurs because the market is a forward-looking indicator. Movements in the market are changes in the collective estimations of future cash flows from companies. The only way we can insure we capture those big “up” days is to remain invested in a balanced portfolio.

Past epidemics are a reminder of just how quickly the markets can drop and recover again. This paper from Nick Maggiulli called “How Will Coronavirus Affect Your Portfolio?” does a good job of illustrating the market reaction to past viruses and pandemics (https://ofdollarsanddata.com/how-will-coronavirus-affect-your-portfolio/).

The bottom line is that markets tend to recover long before we are reading good news in the headlines. Even a terrible pandemic like a Spanish flu only depressed markets 10% over a period of 4 months. There are indeed some unique challenges with this virus, but our ability to mobilize efforts toward containment, treatment and cure is better than in 1918. There is some probability that this virus will be more damaging and last longer than pandemics in the past, but that is not our base case.

Knowledge is confidence and confidence will lead to optimal investment outcomes.

If you have any questions about your portfolio, your financial plan, the economy, or the markets, please do not hesitate to reach out to a member of your team at Baker Boyer. We are here to help you in good times…and those that are more stressful. Lean on us. We’ll give you the knowledge to successfully navigate these volatile waters.