I read two bite-size pieces of content last week that equally affected me:

“The whole reason stocks tend to do well over time is because they make you put up with stuff like this. It’s the cost of admission. A feature, not a bug” – Morgan Housel Collaborative Fund

“Telling people to ignore the noise is telling people not to be people” – Michael Batnick Ritholtz Wealth Management

As an advisor to families, endowments and corporate retirement plans our firm lives in the tension of these types of statements often. The ability to substantiate recommendations with facts, as opposed to noise, while recognizing each client that we work with has a unique set of circumstances hopefully validates our name Human Investing.

Our team (probably like you) is learning, reading and writing about the set of current events.  Like Housel and Batnick mention, it’s a combination of having perspective (in other words we’ve been here before) and recognizing that each time the market flirts with “correction” territory it’s a reasonable behavior to feel uncertainty.  We find the charts, statements, and questions listed below helpful when talking to clients and hope you do as well.

For most people, this is a price of admission scenario:

Today was the 17th worst day for the S&P 500.  Since 1825 the US Stock Market has returned nearly 10% per year. The below histogram does an excellent job of showing how those returns are plotted over the last 195 years. Like we mentioned above, investors do not receive excellent returns without taking on risk. Days like today are the price of admission.

“But this time it’s different”

You’re right this time it is different due to the speed of the market declining and the intersection of COVID-19, oil prices steeply declining and the federal reserve lowering interest rates. Not to be dismissive of the current world events, but it’s different every time. It was different during the dot com bubble and the 2008 financial crisis as well. These visuals help provide perspective regarding the current volatility we are seeing and what’s normal.

A.  Drawdowns in the market happen all the time. This current drawdown is around 18% (so far) which is slightly below the normal intra-year drawdown of nearly 14% since 1980.

B. These charts show that while the speed of this drawdown is occurring faster than normal. The fact that we are experiencing volatility linked to world events occurs more often than we might initially think.

“Buying into this market seems terrifying should I go to cash (or stay in cash if applicable)?”

Two scenarios come to mind:

A.  You’re fully invested right now: Market timing is rarely (most likely never) a good idea. This is where knowing yourself as an investor and the qualitative side of the equation matters as much as the data. If slightly reducing how aggressive you are will allow you to sleep at night and not press the “sell all” button then consider strategies along those lines that lead to better long term outcomes. Otherwise, stay the course.

B. You’re in cash right now and waiting for an entry point: Consider this scenario. Over the last 20 years, the worst day to invest in the S&P 500 was April 7th, 2000. As the chart below shows $10k invested then is worth around $27k today. However, it took until December of 2013 (over 13 years!) for the $10k to be made whole on the initial investment and never look back. It’s a good case study for the recent worst-case scenario of investing in stocks and more specifically investing a lump sum of cash.

What’s tomorrow, this next week, this next month have in store for investors? Carl Richards said it best, “Are you concerned about days or decades?” Investing calls for a long term approach. Let’s take a page out of Warren Buffet’s book and get back at it tomorrow.

“Be fearful when others are greedy and greedy when others are fearful”

— Warren Buffett

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@derstudi

The fear du jour is COVID-19, also known as the Coronavirus.  Each of us has a lot to be concerned about, particularly given the uncertainty of epidemics and even pandemics—couple this with volumes of misinformation and fear stoked by the media. Outbreaks of infectious diseases have consistently occurred over the past century; names like Spanish Flu, Asian Flu, Hong Kong Flu, SARS, Swine Flu, Ebola, Zika, and Dengue are just a few. Although unnerving and cause for concern, we are still here today functioning, producing, consuming, and living life. 

For the investment community, the concern is less about the loss of life and more about productivity, consumer spending, and growth. With consumer spending in the U.S. making up approximately 70% of GDP, the concerns of an economic slowdown are valid. Important for market participants is the material impact of the slowdown due to a lack of spending.  At the same time, furloughed workers and canceled events may harm a company’s ability to make money. Regardless of the situation, company earnings may potentially go down due to the widespread impact of COVID-19—and with it, their stock price often follows. 

YOUR FINANCIAL PLAN PREPARES YOU FOR THE UNEXPECTED

It is important to note that these are the current events; we are just reporting the news as we know it today. A financial plan, constructed by a Certified Financial Planning Professional or CFP®, considers the market impact of pandemics, wars, natural disasters, and the like. These situations, although not explicitly named in the financial planning calculations, are implied in the battery of historical market performance tests (called Monte Carlo Simulations). As such, those with a plan (investment, retirement, etc.) should stick to the plan. Now is not the time to go and make drastic changes. As one Human Investing client put it, “Now is when everyone needs a plan and partners they trust to achieve it.”

The worst days of the market may be ahead. Alternatively, the market could bounce tomorrow and be back on track for another stellar year. This is why during volatile times we look to the thoughtfully developed plans we created alongside our clients. In times such as these, we are grateful for each of our clients who have placed their trust in our firm over the last 15 years, and we look forward to connecting with you soon.

Sincerely,

Peter Fisher

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In my last post, I wrote about the positive impact of financial planning on an investor's ability to stay in the market and manage the cognitive bias of loss aversion. In this post, I want to address recessions, market performance, and the cognitive bias of "recency." Recency bias occurs when an individual is more inclined to remember something that happened more recently than what may be recognized years before, creating a bias.

Economic Slowdowns and the Market

Several times in the last few days I have heard a stock market prognosticator suggest an economic slowdown is upon us. So, what is a slowdown or “recession”? Technically speaking, a recession is two consecutive negative quarters of GDP growth. Importantly, recessions are not uncommon and do not necessarily coincide with a decrease in the stock market.

While examining the chart below, the first column highlights the last nine recessions. The next five columns track the corresponding stock market performance for one year before the recession, the stock market return for the length of the recession, along with one, three, and five-year performance following the recession. In my view, the data is quite interesting and full of surprises.

Recency Bias

Recency bias, as mentioned above, clouds an investor’s understanding of complete market data. As such, with the last two most recent recessions having had a negative 35.5% and 7.2% respectively, investors are more likely to believe all recessions have comparably negative returns—this is in fact not true. 

Although recessions and market volatility are unnerving, it is both normal and part of the price we pay for the opportunity to achieve fantastic long-term returns. We encourage you to focus on the financial plan which offers investors the best odds of achieving financial success.    

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I’ve done it with a construction project at my house and maybe you’ve done it with your retirement account. Yes, I’m talking about going to Uncle Larry, the person who is never short on advice but not necessarily an expert. For those of you who aren’t tracking, “Uncle Larry” is a figurative yet all too real figure who is willing to give out advice about most anything, and we tend to eat it up. Even though Uncle Larry is a tongue-in-cheek character, the reality is I’ve seen the damage he or she has done to retirement accounts. I get it, finding sound unbiased advice isn’t easy and the deck can be stacked against investors when it comes to receiving it. The good news is there’s hope. While we can't always run away from unsolicited advice, we can be equipped with some perspective and good questions to ask. My hope is to provide an outline with some good questions and standards when it comes to receiving advice, regardless of whether it’s from a family member or professional.

What’s your track record?

• This question might be a little awkward if you’re asking your sister-in-law at the Thanksgiving table, but it is a reasonable one if she is offering advice on your retirement plan.

• Don’t be afraid to get specific! If it’s an advisor, ask for references. If it’s a family member, ask for last year’s statement!

What’s your process for a recommendation?

• If all your older brother is doing is simply looking at what fund has performed best for the last 3 months, odds are you aren’t going to be in a good situation. Instead, looking at the funds expense ratio, or cost structure of the fund can be a great resource. The lower the expense ratio (relative to the asset class) the better the predictor of returns.

Is there a conflict of interest?

• This question is more specific to the cousin who works as a stock broker. If the name of the company she works for is the same as the name on the mutual funds in your account, that’s probably not a good sign. Imagine if Pizza Hut was the judge of the country’s best pizza; that’s like asking for the best fund from someone who is compensated by the recommendation they are making!

So what do I do?

• Ideally you have a personal financial advisor or an advisor through your retirement plan who aligns with your best interest, Registered Investment Advisor (RIA). It’s worth asking if your advisor is a “fee only” fiduciary who by law is required to act in your best interest.

Human Investing is one of many companies who act as a fiduciary to clients and plan participants. Note: that our official stance on receiving advice from a non-professional family member is not a best practice. However, if your Uncle Larry has given you advice and you would like a second opinion, we would love to help you. Please don’t hesitate to email or call!

Call: 503.905.3100

Email: andrew@humaninvesting.com

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