Thoughts on Where We are Now and Headed

Blog post #441

As we near the end of April 2020, we thought it would make sense to step back and consider the past few months, as well as approaches for the future.

  • As we have stated many times in the past, one of the basic concepts that we have told our clients is that we do not have a crystal ball and we cannot predict the future. No one can accurately predict the future, repeatedly and successfully.
  • This is why we work with you as a fundamental building block to develop a personalized asset allocation strategy developed for your personal circumstances and needs.
    • Throughout this crisis, and many others that have preceded it, having an Investment Policy Statement (IPS), or asset allocation plan, has enabled clients to remain invested and in the long term, be able to continue and reach their financial goals.
    • We can’t control or predict the financial markets. But we can control your plan and how you are invested, to meet your short-term withdrawal needs and your long-term financial goals and objectives.
      • Thus, we recommend continuing to adhere to the strategy of maintaining your personal Investment Policy Statement (IPS), or asset allocation, especially in this very unpredictable period.
  • Despite a decline in your account value, which you could view as temporary, a key question to ask is: has this decline directly impacted your ability to have the financial resources that you need today, or within the next year?
    • While none of us are happy that account values have declined, the answer for all of our clients should be that they have the financial resources that they need for the short to intermediate term, for the next number of years. This positive answer is due to proper planning.
  • The stock market is not the economy.
    • Remember, the stock market tends to look into the future and may not reflect what the economy is doing right now. The stock market can be driven by many factors, such as cash flow and profit/loss projections, predictions and emotions.
  • Fed Chair Powell has done a terrific job so far.
    • The Federal Reserve has been strong, responsive and acted swiftly when needed, especially in March and early April. This is one of the key reasons that the stock market has recovered significantly from its March lows.
    • The Fed’s actions have helped to solidify the fixed income markets and has enabled many public companies to sell bonds during this crisis, to help them to have the liquidity to get through the shutdown period. The Fed’s decisions to purchase bonds of companies that were credit worthy prior to this crisis, and then expanded to less than investment grade debt, has also helped to stabilize the credit markets.
  • Diversification works, for both stocks and fixed income
    • We are strong believers in diversification at all levels, as are the mutual funds that we use to invest in.
      • The past few months has not changed our minds about this. If anything, during a crisis, diversification again has proven to be very important. 
    • While our client accounts have been volatile, there has not been the huge destruction of your investments compared to if we held a portfolio that had been concentrated in certain sectors, say for example…..lodging and travel, aerospace, airlines, retail, entertainment and energy. We have not had overall 40%-50%-60% declines, though these sectors are held as part of a diversified portfolios.
    • We don’t place bets on individual stocks or focus on sectors. The asset class funds that we use strongly believe in diversification and have guidelines across industries and companies, as well as geographic regions, for International and Emerging Market funds.
    • While we still believe in our core investment beliefs, that does not mean that we don’t make changes. We have modified our portfolios over past months, prior to and during this crisis, to reduce some exposure to small value holdings in both the US and internationally. We did this for the long term, as we wanted to increase exposure to small cap asset classes that were not strictly small value.
      • In the short term, this has been a positive move. Again, this was made to increase diversification further and should benefit clients over the long term, as we cannot predict which asset class will outperform, or when.
    • In fixed income, we have always been well diversified, and we are taking steps to strengthen your holdings, and add even greater diversification.
      • Due to the economic impact of the Covid crisis and the plunge in oil prices, certain companies that previously were investment grade or not at risk of near-term bankruptcy, are now potentially more at risk.
      • We have been proactive in selling bonds of companies that were previously much stronger financially. We would rather sell these bonds now, prior to their maturities, and not put your investment principal at further risk with these types of companies.
      • We are reviewing clients’ fixed income holdings very carefully, as we always have, for exposures to sector and financial risk.
      • We are using large and well-established bond funds with excellent track records, processes and methodologies, more than we did in the past, so your fixed income holdings will be even more diversified.
      • We will be more carefully monitoring the impact of this crisis on municipal bonds, as state and local revenues have been impacted. We already know that some of the strict purchasing guidelines we have in place, and have had since we started our firm, are still valid today, and have helped us avoid municipal bonds which are related to single sector issuances, like airport or certain single source building projects.
      • We want the fixed income “Foundation” of your portfolio to be as financially sound as it can be, even during this period of greater financial uncertainty.
  • Expect the unexpected
    • This certainly has been the case over the past few months. However, even with all this uncertainly, and there could be more in the future, we want you to have a sense of financial comfort.
  • We will continue to act and make rational decisions, not emotional ones. We are not going to place bets on when a vaccine will be discovered or how fast the economy will recover…..as no one knows those answers. We do know that sticking to a philosophy works, over the long-term. We will continue to do the following:
    • Regularly review and rebalance your accounts.
    • Place tax loss trades as appropriate, which will save you tax dollars.
    • Adhere to your financial asset allocation plan and modify that if your circumstances have changed.
    • Having a strong fixed income foundation and ample cash and liquid assets for those regularly withdrawing money.
  • We have again been reminded why we avoid certain types of investments.
    • We don’t invest in investment funds or products that are considered illiquid or restrict your right to redeem your money to a certain percentage a quarter or annually.
      • Many of these types of investments are not permitting withdrawals or severely restricting investors’ access to their money. We don’t want your money to be restricted, so we don’t use these types of products.
    • We don’t invest in high yield or junk bonds, as they have the greatest risk of default, and many of them declined significantly in value during past months. The higher interest rate that they offer are not worth it, if you don’t get your principal back.
    • We don’t invest in stocks primarily due to high dividend yield, as those companies tend to be the riskiest, like junk bonds. This does not apply to all companies, but those paying a very high dividend yield is often a sign of some type of underlying risk in the company. And usually the risk is not worth it, especially if the dividend is later cut or eliminated, or the price of the stock eventually declines significantly. This is what has occurred to many energy stocks. While the funds we utilize hold energy stocks, the exposure is quite small.
      • Bottom line….don’t reach for yield…..if the interest or dividend yield is far above the market average, there is usually a good reason…it is much more risky.

 

As always, we are here for you, and family members or friends who could use our guidance and assistance during this crisis.

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