“Be fearful when others are greedy and greedy when others are fearful.” – Warren Buffett
This is one of my favorite investing quotes as it has proven accurate throughout history and is a constant reminder of how I try to live my life. I realize that amid another crazy week, which has seen trading halted on two separate occasions, this probably provides little assurances or comfort. Also, I recognize that the world is in uncharted territory with the actions taken globally and abroad to contain the current spread of COVID-19. However, I still think it is important that we separate fact from fear and focus on the truths rather than the uncertainties.
I have been asked in recent weeks, “Will this get worse and where is the bottom?” My response has been unequivocally consistent, “I have no idea.” If I am being truthful, the markets can certainly go lower from here, but they could also bounce off the current levels. The challenge with market timing is that it is easy to get out but very difficult to get back in (how many people are still sitting in cash from 2008?).
Many investors in 2008 thought the market would continue to fall as it had done from the high on October 9, 2007 through the low on March 9, 2009 with the S&P 500 (total return index) losing 55.25%! So, after a 55% decline, why would one believe that the market had actually bottomed on March 9, 2009? Out of curiosity I did a quick Google search for headlines on this day to see if the messaging provided a sense of comfort that could have alerted me that the bottom was in place. Below is a brief summary of what my 30-second search returned. It reminds me of the same type of noise we are hearing today.
Market Headlines – March 9, 2009 (Financial Crisis Bottom)
“Economy has fallen off a cliff”
“Big bad banks – do we need to close them”
“Banks on life support – should we let them fail”
“We are in an economic Pearl Harbor”
“I’ve never seen the consumer more fearful”
“Should you put your money under a mattress”
The beauty of hindsight is that it is easy to see the market tops and bottoms and it reaffirms the benefits of long-term investing. However, when you are in the middle of the storm it is very difficult to think rationally, and it feels as if the short-term downfall will never end. Below is a chart that highlights the S&P 500 total return from the October 9, 2007 high through today’s current price. Over a cycle of 11+ years we have experienced two market crashes (A crash is defined as a 20% pullback from the previous high) with the 2008 financial crisis (-55% correction) and the current COVID-19 market crash (-25% at time of this writing) and the S&P 500 is still up over 112% during this time.
*Past performance is no guarantee of future results
As a client, you know by now that we are long-term investors and do not believe in market timing. What we do believe in is appropriate diversification which allows investors to weather the storm and for us to apply a disciplined methodology throughout all market cycles. While diversification requires us to apologize often (2019 – Why was I in fixed income? 2020 – Why didn’t you sell my stocks?), it provides you the mechanism to withstand the short-term market downturns. To be a true long-term investor, you must be willing to lose over the short-term. This has been the one constant truth throughout the history of the stock market and is the reason we remain so steadfast in our approach.
While I don’t know what tomorrow will bring, I do know from past experiences that markets can turn quickly. The S&P 500 fell -12% between September 10, 2001 through September 21, 2001. (The markets were closed for 7 days after the 9/11 attacks, so the fall only included 6 trading days.) However, it recovered 14% over the subsequent 15 trading days between September 21st and October 11, 2001. This type of quick recovery is consistent with past corrections and is often the result of markets overreacting in the short-term.
I can’t tell you when things will turn around, but our expectation is that bearing today’s risk will be compensated with positive long-term expected returns. This has been the lesson learned from past health crises such as SARS (2003), Bird Flu (2006), Swine Flu (2009), MERS (2013), Ebola (2014), and Zika (2016), as well as past economic recessions. Click Here to review my prior commentary on how markets have responded during past health scares.
In the meantime, I will continue to practice what I preach and will be investing my 401(k) contributions as they hit my account. Those clients near retirement or in retirement can take comfort knowing that we maintain 6-10 years of portfolio draws, via your fixed income holdings, thus allowing your equity positions to recover after the correction subsides.
I will close with the following client-approved deliverable from one of our most trusted research partners, Dimensional Fund Advisors. This chart shows the historical average 1-year, 3-year, and 5-year returns after a market decline of 10%, 15%, and 20%. I take solace knowing that today’s short-term pain will be offset with future years of positive returns. When we look back 10 years from now, I expect that COVID-19 will simply be another data point in an otherwise positive trendline.
Stay safe, enjoy your loved ones, and together we will all get through this. Thanks for your continued support in the good times and bad. We are so thankful for each and everyone of you!
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