The Informed Investor
During unusual times of great uncertainty that result in financial and emotional turmoil, people ask themselves and others the same six questions throughout history. I believe it is useful to raise these questions now as well as offer appropriate responses. Through this effort, I sincerely hope that it provides you the balanced perspective necessary for logic to triumph over emotion.
1st Question: Is this time different?
Response: Of course! All unprecedented events…The 1918 Spanish Flu Pandemic, 1929 Great Stock Market Crash, World War 2, 1987 Black Monday, 9/11, The Great Financial Crisis of 2007-2008 and others possessed unique circumstances. In some ways, they were more alarming than today…more lives lost, slower and/or weaker central government response, faster financial collapse, etc.
What did they all have in common, without exception? Each unprecedented event resulted in an economic and financial market recovery. Most importantly, our national and global economy as well as economic prosperity continued to grow throughout time, albeit not all the time.
2nd Question: Should I buy, sell, or hold my financial assets?
Response: If the market resumes its long-term upward trend soon then those that buy will be rewarded most. However, if financial markets continue to drop before ultimately rebounding, then investors who bought too soon will amplify their losses and take longer to recover. Most importantly, studies have consistently shown throughout history, although some believe they are an exception, that the overwhelming majority of those who sell into large market drops inevitably buy back some day at even higher prices. This decision subjects these investors to the greatest of all risks. When the next market disturbance occurs, they are exposed to the greatest losses due to their reentering the market higher than where they initially got out. Thus, by trying to evade further short-term risk and increase their peace of mind, investors jeopardize long-term financial security by possibly missing the recovery when it occurs.
3rd Question: Why do higher quality as well as lower quality financial assets decline in price during these times?
Response: Institutional and retail investors alike sell what they are able to easily liquidate. Low quality financial assets incur the most depressed prices or cannot be sold, so investors resort to selling what is easiest, which are higher quality financial assets. Therefore in the short-run, the baby (good assets) gets thrown out with the bath water (bad assets). The result is that these investors are often left holding suboptimal assets.
4th Question: But my financial situation is different, isn’t it?
Response: Not as much as you may think. Every city, county, state, university, church, labor union, and corporate retirement plan, and all the people they benefit, has been adversely impacted in a similar manner. These entities do not panic sell into chaotic market conditions. Industry best practices require that all institutions have policies to prudently guide them during these unstable periods. The Investment Counsel Company adheres to the same discipline on behalf of every client. Institutions that oversee assets on behalf of others take a long-term, not short-term, approach to decisions even under these circumstances in order to attain their most important objective, the abiding welfare of others. Most, if not all, of these people (retirees, public and private sector employees, white-collar and blue-collar workers including lower income and business owners alike) need money for living expenses in the short run. The fact remains that all these people and related entities share the same needs and concerns.
5th Question: Why are times like this so emotionally uncomfortable for me?
Response: Under periods of emotional stress, many begin to speculate about the possible longer-term ramifications, especially if circumstances worsen. During these times, they focus on the here and now, wanting to limit their losses, and place far less emphasis on their larger long-term needs and goals. It should never be forgotten that the point of maximum emotional discomfort is when sellers are done selling and buyers step in to capitalize on this rare opportunity, serving as a catalyst to initiate a market rebound.
6th Question: Should I be concerned about the current decline in the value of my financial assets?
Response: After contemplating about recent declines in account values, some investors may draw the conclusion prematurely that there is a chance that they may have insufficient funds to maintain their current lifestyle. Speculating about future events without taking into consideration how much is not known at the moment is a dangerous recipe for costly and regrettable decisions.
The response I gave in 2009, 2000, and 1987 is still valid today. It is premature to draw such conclusions since there is so much we can’t know just yet. But we do know that the COVID-19 panic will cease and the global economy will recover and return to prosperity. What is most important is that people act responsibly with their money, especially now. That said, having a sufficient source of income in the interim is far more critical than the day to day fluctuations in a family’s investment account or personal financial statement. Our Firm proactively 1) changed client accounts from reinvesting stock dividends and bond interest to pay to cash in their account, and 2) held back from rebalancing accounts to maintain higher income and better preserve clients’ principal.
The questions and answers above are intended to provide you greater clarity of thought and straightforward responses during a time where the media strives to greatly influence investors’ emotions.
Randy A. Garcia, Chief Executive Officer