What incredible times we are living through right now. About six weeks ago here in the United States all seemed quiet, and the economy strong. Of course, there are always problems but, by comparison to today, things were positive…and now that seems like a long time ago.
Regardless of how this coronavirus issue plays out, the lesson we can already take from this is that…’you just never know’. No matter how good things seem, and no matter how long the fun-ride has lasted, it always comes to an end, and usually when we least expect it.
“Flatten the curve”… a phrase that once was usually uttered only by data scientists or statisticians, has now become part of our everyday vocabulary. This is the idea that to minimize the damage of a virus, a population must enact restrictions, either voluntarily or by government intervention, that reduce the spread and thereby limit the number of cases to a level where the medical system can address each case effectively. A critical mass exists which illustrates the point of maximum capacity for the system. Then, over time, the population builds resistance, develops vaccines, and increases its ability to handle future breakouts.
We have been through this before; while managing client accounts through the Financial Crises of 2000 and 2008 , our clients held true to their long-term objectives, but we witnessed an eerily similar ‘curve’ among other investors out there in the general market relating to investment returns and investor behavior. The market-stress version of the ‘curve’ graph relates to a drop in an investor’s account values during a declining market, and what happens when their investment values reduce beyond the point at which they can emotionally maintain the investment plan that was developed prior to the crisis. Once the drop reaches that point, many unsupervised investors will tend to abandon their financial plan and run to safety, or look elsewhere for alternatives to ease the pain and anxiety of declining values, at which time the ‘curve’ indicating the number of fear infected investors gets higher, similar to when people disregard the “social distancing” mandate because they just can’t stand being distanced any longer, and the virus infection ‘curve’ gets higher.
History has proven that, at some point later, investors will regret this decision to flee, but in the irrationality of the moment a biological ‘fight or flight’ response can take hold. The subsequent ‘de-risking’ of the investor’s portfolio can help with short-term anxiety, but it leaves the investor with the realized losses incurred upon selling those investments, along with the question of when is it safe to reinvest.
Similar to the concept of containing the spread of a virus, adherence to an Allocation Model can ‘flatten the curve’ for an investor by staying below the point where they cry “Uncle!”, and calming their anxiety enough to keep them on target for the long-term. Our data suggests that mitigating risk, while maintaining proper exposure to the market, is the key to successful long-term investing, which is certainly the purpose of our keeping your Model in place.
Times like these are when keeping your goals and objectives in focus becomes most important, especially when something that has never happened before, or rarely happens, does happen. For over 20 years now we have researched, built, and executed portfolios on this premise. We do not like to experience periods like this, but we are pleased that our portfolio models have weathered the storms of previous financial crises, and this time is no different… except for what has caused it.
We are grateful for all of our clients, and appreciate your faith in our firm; here’s hoping you continue to be safe, healthy and blessed.