This Is NOT 2007!
Eleven years ago today, the markets bottomed after the mortgage and housing crisis; seventeen years ago this week the markets bottomed after the dot.com bubble burst. These were two of the most recent market drawdowns, but by no means are they unique. In fact, since 1940 there have been seven such drawdowns of more than 35% - about an average of once every 10 years. While these occurrences happen relatively infrequently, they enact an emotional toll on investors while they happen.
In fact, every time equities move 10% lower, which happens roughly once every 18 months, there is a tremendous amount of mental anguish trying to determine if “this is the one”. It helps to put these moves in perspective. The 1973-74 bear market put prices back to where they were in 1958. Our current market decline has put prices back to January 2019.
Significant market declines will always occur during an economic cycle – they never feel good and they always end. Unfortunately there are no “rules” to follow when they occur. If there were, then everyone would follow them and there would be no decline. The reality is that we cannot predict when these occur but we can control our actions while they are happening.
One of the most effective ways to determine control during these periods is to understand the level of risk that you are actually taking in your portfolio. Over the long term, risk is highly correlated with reward, although over a shorter term, these correlations often break down. But if your portfolio is 100% invested in equities, then you should be relatively comfortable with a short term decline of 45-50%. If you are in a 50%/50% balanced portfolio, then you should be able to stomach a 20-25% decline.
It also helps to realize that markets don’t stay in these decline periods for long. In fact, since 1940 the amount of time that markets have spent in a -20% return environment has been less than 15% of the time, and less than 3% of the time for declines of 30%. As the Buddhists say “this too shall pass”.
However, saying that does not mean to sit and let things happen. Part of our portfolio management is to assess the probability of market risks on our portfolios, and measure if that risk will impact the success of your investment plan. Towards this end, we have taken steps to reduce risk and exposure over the past six months – moving our tactical allocation to a defensive position, increasing our exposure to gold, and significantly reducing our exposure to high yield. While this means that we will still have exposure to negative markets, it also means that we will not participate as much in the decline. It is also important to understand that risk can be priced attractively, and that there will be a point that we will be overly compensated for taking more on.
For any investor with a medium- and long-term time horizon, to abandon an investment plan because of this volatility means that you believe two things:
• Coronavirus will cause a significant and lasting global economic slowdown that will cause global growth to essentially stall for months and quarters.
• Coronavirus will significantly impact U.S. corporate earnings for months and quarters to come, and there will be no rebound in the delayed economic activity that’s occurred.
As of today, and as we have pointed out in previous notes, we do not see the evidence of these occurrences as being likely. The market has placed bets on “what-if” scenarios which have yet to be realized. If mounting evidence shows that this will be the case, and that your investment plan will be affected, then we will have a corrective action plan in place.
About HFG Wealth Management
HFG Wealth Management, LLC is an independent financial planning and wealth advisory firm serving individuals, families, and business owners in The Woodlands, Beaumont and the Port Arthur area, and nationwide. HFG is committed to building meaningful relationships with clients that seek to span time and generations, helping clients live the lives they desire while also helping achieve their financial goals. Founder and CEO Larry A. Harvey, ChFC, with 35 years of experience and leading a team of experienced financial planning and support professionals, takes a highly personalized approach to financial guidance. HFG Wealth Management has integrated the complexity of financial life planning and investment management services into a customized wealth management offering. HFG is committed to keeping clients balanced, yet seeks to be flexible in response to constantly changing market conditions, all while providing ongoing support to help clients maintain a disciplined approach to realizing their financial objectives. To learn more about HFG Wealth Management, connect with them on LinkedIn.