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Not Our First Rodeo

by Robert W. Tull | March 23, 2020 | Financial Planning

Monday, I was returning from an extended trip with my family. We had been out west, which we love to do near winter’s final gasp, getting some hiking and skiing in before the Virginia spring begins. It seems there have been numerous trips like this where news comes out while we’re away, which results in the stock market dropping. Well, it happened again as we were preparing to fly back to Norfolk.

This time it was the fear of the Coronavirus that was causing stocks to plunge and U.S. credit markets to be strained. Fears have been intensifying that the spreading virus will hurt corporate income and some companies’ ability to repay debt. The scale of the crisis will depend on how long it lasts. Having been a financial planning services Investment Advisor for almost as long as I have been married, when I showed my iPhone to my wife Cathy and she viewed the market volatility, she calmly looked up and said, “This isn’t your first rodeo and it won’t be your last,” What wise words coming from her as she understands that we have experienced the ups and downs of the market in the past and will do so again in the future. She also understands how seriously I take the responsibility of advising our clients, a task I have faithfully done for more than thirty years.

One of the areas in which I work very hard is educating our clients regarding the importance of setting one’s allocations of stocks and bonds in advance of an unexpected event such as we are now experiencing. The higher the fixed income, the less the volatility, but also the less the opportunity for growing your assets. Often, I will receive a call from a fearful client. In the background, I can hear one of the 24/7 financial cable channels while they ask me if now is a good time to sell some of their stocks, converting it to cash. I always acknowledge the concern they are feeling and remind them of the old saying: be fearful when others are greedy and greedy when others are fearful.

This may sound a bit crass, but it helps to remove our emotions from the decision-making process, which is quite normal. It is important to remember to set your allocation of stocks and bonds before events occur, and to stick to your plan during times of market volatility.

This is especially true for those financial planning services clients who are retired and drawing from their investment portfolio each month. Many of you may remember when companies provided a pension to their employees upon retirement. Today those guaranteed streams of income are rare and have been replaced by the standard 401(k) plan or IRA. Once reaching retirement age, these funds are drawn upon to meet expenses during the retirement years. Because of this, it is imperative to discuss the proper risk level for a retired client’s portfolio in advance. We don’t want them to sell at an inopportune time.

Years ago, I learned an important tactic from Howard Evensky, an experienced financial planner from Florida, while attending one of his workshops. He stressed the importance of setting aside 12-18 months of future spending in a money market account. The logic of his advice coincided with what my graduate school professor shared in my MBA class at The University of Houston; that bear markets (declines of 20% or more) generally average 7-10 months. Put together, if there is unexpected news that results in the market dropping precipitously, you have cash set aside to draw down without having to sell equities at an inopportune time. It provides a calming effect for clients who may be watching too much financial news.

Another principle to remember during volatile times comes from another Howard that I highly respect. Howard Marks is the co-founder of Oaktree Capital Management who shared in a Bloomberg Television interview last week that, “The market selloff is creating enough bargains for investors to begin buying, though it’s too soon to call the bottom. We’re certainly buying… If you’re a distressed investor, you must turn more aggressive when you’re given good chances. I’m not saying this is the bottom, but this is certainly a time to do some buying.”

No one can predict when a bottom occurs, but we do know that stock prices and lower valuations create better forward-looking expected returns. What we know for sure is that panicking or overreacting to news headlines is never a good investment approach. There are always uncertainties and unexpected external shocks that can hit financial markets—at any time. But if you are invested in an appropriate portfolio for your risk tolerance, investment objectives, time horizon, and financial goals, then this recent event—or any short-term market shock—should not change anything. (If a short-term market shock or sharp drop is keeping you up at night or causing extreme stress, that may be an indication you are not invested in an appropriate portfolio for your risk tolerance).

As stated at the beginning, I do not believe most financial planning services investors can be successful jumping in and out of markets in response to short-term news. If one were to sell equities now in response to the Coronavirus, what is the signal—the investment discipline—to “get back in?” Just as the markets are discounting the incremental negative news on Coronavirus (prices are falling), they will also be discounting good news as it comes out and prices will rise.

The best advice, when you land mentally or philosophically on the topic of the virus, is use wisdom but keep living. Go for a walk with a friend or your spouse. Send flowers to someone who is homebound. Write notes, emails, and text messages to those who are nervous. And finally remember the well-documented natural human behavioral and emotional biases that can work against being a successful long-term investor. If you need funds, use the cash or bond portion of the portfolio. Consider the wisdom my wife reminded me: this isn’t your first rodeo and most likely it won’t be your last. It is part of the journey we call investing.

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