With several sports associations suspending or cancelling their events this week, including the NCAA basketball tournament due to the spread of the coronavirus, many investors wish the stock market could be suspended too. The stock market (represented in this case by the S&P 500 Index) is officially in a “bear” market after dropping more than 20% from its peak this year. The “bull” market that began in March 2009 has finally ended after being the longest and best returning bull market since World War II.
It was another volatile week for the stock market as investor fear increased with the spread of the coronavirus. The other big news was oil prices collapsing with Saudi Arabia intentionally lowering prices by increasing their production. They aggressively engaged in an oil “price war” with Russia and other countries, believing that they are in the best position to survive with low prices. As a result, energy stocks plunged this week which only worsened the falling stock market. However, in the long run, low oil prices can serve as a stimulant to the economy. There was some positive movement in the market at the end of the week, as the Federal Reserve and government promised further stimulus programs.
We knew the bull market had to end at some point and usually the catalyst that turns the market is unpredictable, as was the case this time with a surprising global pandemic. We have been preaching for a long time that the U.S. stock market is “overvalued,” meaning that its price relative to its earnings (cyclically adjusted being the best earnings measure) was far above historical averages. It is impossible to predict when exactly the stock market will correct, but we feel that it will find its “fair value” at some point.
Therefore, rest assured we have been preparing our investment strategies for a significant market drop like this. We have stuck to two important guidelines when creating an investment portfolio for our clients:
1. Each client should have at least 3-6 months (and 12 months in many cases) worth of living expenses in cash or very short-term bonds. This is why the majority of our clients have what we call “yield” accounts to serve as the source of investment withdrawals and an emergency reserve.
2. Each client’s investment portfolio should consist of 3-5 years’ worth of their investment withdrawals in high quality bonds. Based upon history, nearly all bear markets will recover their value within 3-5 years. Therefore, clients can generate the cash needed for withdrawals from the bond portion of their portfolios and not be forced to sell stock while it has declined in value.
The end of this bear market is difficult to predict and could continue for months. Instead of focusing on what the stock market will do over the next few weeks or months, try to think where it will be in the next few years. As two of my mentors often tell me, you don’t actually lose any money in the stock market until you sell stocks at a loss. Any losses right now are just on paper or a screen. We feel that we have designed our client portfolios to withstand a bear market so you can minimize the actual losses.
When the stock market goes up, everyone looks like an investing genius. It’s only when the market goes down that you see who actually has a good long-term investment strategy. Maybe one of my heroes Warren Buffet said it best with “Predicting rain doesn’t count, building the ark does.” Another Warren Buffet quote might summarize our investment strategy and the current environment we find ourselves in; “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
Please reach out to your financial planning team at 515-225-6000 with any questions or concerns.
Disclosure:
