Dear Friends,
I hope this note finds you and your family well and in good health. As you may know, fear of the potential economic impact of the spread of the coronavirus from mainland China to other regions of the world has precipitated a broad and significant market correction. Although a little more than a week ago the major stock market averages were at all-time highs, over the past week they have experienced a precipitous double digit decline. It’s natural that you may have a number of questions and concerns, and it is my hope to potentially address some of them in this correspondence.
Although understandably painful and unpleasant, it’s crucial to keep recent events in their proper context as they relate to your personal financial plan. Your overall plan was carefully designed and customized to meet your needs and objectives from both a short-term and long-term standpoint. The portfolio strategy implemented remains broadly diversified and well managed. In general, monies earmarked to meet any short-term needs or immediate cash flow requirements have been invested very conservatively in money markets and/or other fixed investments that have not been impacted at all from the recent downturn. In fact, many such investments have actually INCREASED in value. Monies earmarked for longer-term needs and future cash flow requirements with a multi-year planning horizon, however, have declined given their increased exposure to stocks that naturally entail higher short-term risks. Such investments are designed to achieve higher growth potential for the longer planning horizon involved and, despite their recent decline, remain poised to do so.
It’s also important to recognize that your portfolio was designed with such inevitable adverse market periods in mind. Although impossible to predict precisely when they will occur, the fact that a significant market decline HAS now occurred is not a surprise. Nor is such a decline unprecedented. As recently as late 2018, broader stock market indices declined nearly 20%. Yet the subsequent 12 month period entailed a swift and robust recovery with attractive market returns and significant increases in investor portfolios during the 2019 calendar year. I am confident that markets and portfolios will ultimately recover again in time - perhaps even sooner than expected.
Viewing recent market events in their proper perspective is also wise. Despite the latest market decline, portfolios are at similar levels to where they were several months ago. If portfolios had done nothing between then and now, investors would have a much different emotional response than that which we are currently having. If you were pleased and comfortable with your portfolio results then, there is no reason not to remain comfortable with portfolio values at current levels (other than the normal human emotional response of being disappointed or upset when given something only to later have it taken away.) Thus, when portfolio values are compared to their levels 2 years, 5 years, 7 years, etc. ago, the results remain quite favorable, attractive, and compelling in contrast to comparing them against their prior peak.
In addition, the various money managers included in your portfolio plan have a long history with much experience navigating through market conditions of this type, Although generally not immune to the effects of market downturns, they have historically mitigated much of the risk and declined considerably less than the broader market averages. The merits of such investment management expertise are less obvious in favorable market climates, but readily apparent in markets such as these. I am happy to report that, as expected, your portfolio is doing what it is designed to do with its various investment managers and portfolio components “weathering the storm” reasonably well in the midst of such broader market turbulence. Although in most cases portfolios have experienced declines, losses have been much less and reasonably contained relative to the broader market averages. Nevertheless, declines have occurred, and upcoming statements will understandably be most unpleasant given the magnitude of the precipitous drop during the later stages of February.
A logical question you may have is, “what, if anything, should I do?” Assuming that your personal circumstances, goals, and objectives have not changed, the merits of your financial plan and portfolio strategy remain as sound today as they were before. Given that your portfolio plan already considers and anticipates such downturns, the fact that a significant correction has now occurred should not in most circumstances warrant a change in your plan. Money managers are already making prudent adjustments that, consistent with their mandates and investment policies, they feel appropriate. In certain cases many are putting additional cash to work to capitalize on potential opportunities by making additional investments at much more attractive prices. Ironically, in time, the downturn may even enhance future portfolio results as compared to if the downturn had never occurred at all. In case you may be wondering what adjustments I have made in my own portfolio, or in the portfolios of elder members of my family, in response to these market developments? None. Although it may go against human nature and the natural compulsion to feel that one should do “something”, more often than not the optimal and best course of action is to do “nothing.”
The average investor over the past 20 years has earned a rate of return barely above inflation despite investments in general doing quite well. They do poorly solely for behavioral reasons by making emotional decisions. No matter how sound a financial plan is on paper, or how talented the money managers utilized may be, no plan will be successfully achieved without the discipline to adhere to it. My goal, and the focus of my team, is to help you not only successfully achieve the various short-term and long-term objectives you’ve identified, but also earn returns well above those of the typical investor. I remain confident in your plan, its soundness, and its positioning for future success. Markets may get worse before they subsequently improve, but I have no doubt that better days are indeed ahead. Regardless of the severity of the storm, the sun continues to shine beyond the current clouds. Picture the market as a child, playing with a yo-yo, riding up an escalator. If you focus only on the yo-yo, all you see is volatility which causes you to overlook the upward trend of the escalator. Now is a time to stay focused on the escalator. It’s the destination, not the journey, that matters.
As always, please feel free to contact me or other members of my team with any questions or concerns. We are always happy to address them. In particular, if your objectives have changed or if your true risk tolerance may be less than what it was previously perceived to be, prudent adjustments to your plan may be in order. Whether you simply need reassurance or if life events legitimately warrant reasons to modify your plan, we are here to listen, provide wise counsel and advice, and to help.
We appreciate your friendship and your ongoing trust. It is a pleasure and a privilege to be of service.
Sincerely,
-Kevin Smith and the Smith Wealth Advisory Group Team
