The stock market drawdown that we are currently experiencing is the sharpest that we have seen since 2008. As I write, the S&P500 is approaching a decline of 30%, and it has done so faster than at any point in its history. In the second quarter of this year, and before hopefully recovering in the second half of the year, the US economy is likely to reveal the largest annualized drop in GDP since WWII. Part of this decline is a result of the COVID-19 virus outbreak, but a larger part is a result of the extreme measures that the United States government has taken to halt the spread of the virus.
It is a challenging time for any investor to remain disciplined and committed to a long-term plan. As might be expected, we experience a range of reactions in a chaotic time such as this, ranging from panic at one extreme to salivating over discounted purchases at the other. I've heard the full spectrum in recent conversations with my clients, and I can relate to the entire range of these very valid emotions.
My approach to investing can be summarized this way:
- Buy a wide array of stocks, favoring those companies that have higher expected return over time because they are A) relatively less expensive, B) smaller, and C) more profitable. Keep costs low and never time the market.
- Then, offset the volatility inherent in these stocks by combining them with an appropriate amount of relatively stable high-quality fixed income, and carefully rebalance as often as necessary to maintain the formation and continually buy low and sell high.
- Finally, hold the above long enough for markets to grow your wealth.
“The intelligent investor is a realist who sells to optimists and buys from pessimists.”
– Benjamin Graham
As many of you may know or remember, I was hired by SunTrust Investment Services, Inc at the end of 2007. Some of you will remember my corner desk in the Bonita office, but all of you will remember what happened at the end of 2007 through 2009. During my trial-by-fire in the Financial Crisis, I became a student of "crisis investing" out of necessity. The years and events since have deepened my belief that long-term investing is mostly about how one manages through the periodic crises. It is easy to stick to a plan when markets are smooth and growing, but the real gains or losses are made when markets shudder. It is primarily during markets such as these that our investment philosophy of seeking out high quality stocks and bonds and our rebalancing discipline pay off.
(As you may also know, I am fond of metaphors to auto racing, so here goes: a fast lap isn't about the straightaways, it's about the corners. The majority of "speed" in a given lap is gained or lost in the corners, when the car is going the slowest. That's also when you can pass the other drivers. How well the drivers handle the corners determines their pace, and eventually who wins.)
Disciplined investors can exploit simple, predictable rules that allow for outsized returns over time. If there is a weakness in this time-tested approach, it is that investors can only earn the maximum potential return of their portfolios by staying the course through adverse markets. In other words, the main drawback of our investment philosophy is that it depends on investors enduring the inevitable uncertainty and never joining the panicked herd.
Over the years, you and I have had many conversations about the nature of uncertainty, the principals of evidence- based investing and the effects of proper diversification. We have shaken our heads together about the reality- warping and corrosive effects of the financial media, and explored the differences between price and value and between a decline and a loss. We have discussed the ways that disciplined investors benefit from the emotional mistakes of others, and how your personal plan could benefit from a diminished market.
Through these many conversations, we charted a very different course than the ones more commonly traveled by financial advisers and their clients. We have done this work together so that you would be armed with the intellectual tools you might need to keep your head while others around you were losing theirs. That time is now.
“All things are ready, if our mind be so.” – William Shakespeare, Henry V
We do not yet know the exact details of how or when the coronavirus will end, or the downward economic pressure that will result from it.
However, we know that it will end. Markets are very resilient. Regardless of cause or catastrophe, 100% of all prior crises have ended in reaching and exceeding the prior price peak. Even as we accept that the data will likely get
worse in the short term before it improves, we can maintain this confidence in the future.
With this perspective in mind, I can give you the following reassurances: as always, I will continue to manage your family's assets in the same way as I manage my own family's assets. You will sell when I sell and you will buy when I buy. Within your portfolio, we will continually take advantage of opportunities that the market presents to us, consistent with our investment beliefs and with your financial plan. Lindsey, Tom, Dawna and I remain wholeheartedly committed to the Fiduciary Standard, and we will not hesitate to make recommendations to you to ensure that your long-term priorities remain on track.
More than ever, we are here for you.
We are watching the developments around the coronavirus and contraction very closely, and Acadium is processing an immense amount of information regarding navigation through the crisis. If there is anything on your mind that you would like to discuss, or any news that you would like me to help you interpret, please let me know.
Thank you so much for your support and encouragement over the years. We will get through this together.
Best regards,
Frank Hujsa, CFP®, CLU®
Partner, Acadium Financial Partners
27499 Riverview Center Blvd, Suite 108
Bonita Springs, FL 34134
Any opinions are those of Frank Hujsa are not necessarily those of Raymond James. Securities offered through Raymond James Financial Services, Inc. member FINRA/SIPC. Acadium Financial Partners is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc.
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results.