Fending off the Bear

Investing during a crisis requires a certain amount of imagination. You have to imagine yourself ultimately being successful even though it’s tough in the present. And you have to imagine analogies to help get you through since a good chunk of the investing process is psychological. Maybe it’s the old “marathon and not a sprint” comparison, or perhaps the “farmer versus hunter” analogy. How about avoiding succumbing to a bear market by actually fending off a bear?

The following article from Jason Zweig of The Wall Street Journal resonates with me for multiple reasons. The author expands on themes I’ve addressed before about how to view bonds in your portfolio, about the insultation they can offer. Social Security and pensions offer similar protection but are rarely thought of in that way.

The piece also reminds me of my own bear experience deep in the Sierras. It was a large black bear and not a grizzly, and I remember feeling exhilarated and unafraid. I knew enough to remain calm and try to appreciate the experience because it wasn’t going to last. Maybe I’m jonesing for some social distancing out in the backcountry…

The “fending off a bear” analogy is a good one for obvious reasons. Markets are exceptionally volatile and even though prices have risen in recent weeks it’s still a very uncertain environment. So, in a sense, long-term investing these days is like dealing with an unpredictable wild animal standing in your path. You can’t turn back and the next steps you take are critically important.

Click below to read the article, “The Bare Necessities You Need for a Bear Market”. The additions in italics are mine.

Continue reading

  • Created on .

A Little Light Reading

I don’t know about you, but I feel inundated with information these days. Now, much of this is normal in my profession. I’m used to the firehose of research reports, market watching throughout the day, economic news, and trying to keep up and make sense of it all.

But the rapid-fire nature of news reports about the coronavirus in recent weeks left me longing to unplug a bit this past weekend. After taking a deep dive into the $2 trillion relief package signed into law late last week, I looked around for a good book to fall into.

I had read The Wisdom of Finance a couple of times since it was published a few years ago, but it called to me again. Even though our current crisis isn’t the “fault” of finance, as it was back in 2008, the financial impact of coronavirus is all around us. Our lives are inextricably linked to the world of finance whether we like it or not.

So, as we seem to be entering Phase 2 (aka “the grind”) of our response to the pandemic and are being asked to shelter in place a while longer, I thought I’d share this book idea with you.

Don’t let the title scare you. There are no formulas or jargon-laden passages to contend with. Instead, the author illuminates core tenets of finance through stories from pop culture, literature, and elsewhere.

Continue reading

  • Created on .

What's an Investor to Do?

Well, what else can I say other than it’s getting scary out there. At this point we’re all aware of the almost hour-by-hour nature of the evolving virus situation and the new addition to our lexicon: social distancing. This concept will have broad and unanticipated impacts on our local and national economy. The past few days also brought sweeping changes from the Federal Reserve to help grease the financial skids, so to speak, as we prepare for a virus-induced recession.

In terms of your portfolio, it’s time to hunker down. But this doesn’t mean selling everything and burying cash in the yard. Instead, it’s time to focus on fundamentals and trying not to do anything rash. The stock market will find a bottom, likely before the virus situation stabilizes.

This is a psychological challenge for those of us who are independent problem solvers and doers. We see a problem and want to fix it. The problem now is that there’s very little to do in this situation (besides rebalancing as needed, which I’ve discussed already). What you can do instead of focusing on market movements is focus on your health and wellness and getting behind this whole social distancing thing.

While this is all feeling very 2008-ish in terms of market volatility, it’s important to remember our current predicament is fundamentally different in many ways. For example, businesses and consumers entered this situation on a stronger financial footing. Many states have healthy emergency funds. Property values aren’t unnaturally high. Unemployment is very low. The global financial system is healthy. This is all a positive contrast to 2008.

But like 2008, some of the best market days have come right in the middle of the worst days. Last Monday was horrible. Thursday was one of the worst days in recent memory and Friday was the best since 2008. Then yesterday was downright nasty, the fourth worst on record for the Dow. What’s an investor supposed to do except hold on for dear life?! While it’s probably hard to reconcile, we know throughout the long history of the market that missing the best days makes it incredibly hard to keep pace over the long term. We simply must endure the worst to also get the best.

It's important to remind ourselves of this as we go forward into the unknown unknowns of this outbreak. Among the many things we don’t know, just one has to do with the economic cost of social distancing. Yesterday JPMorgan sent out a note discussing its potential impact on the Leisure and Hospitality industries, which account for over 18 million jobs. Some of these are “corporate” jobs where laid-off workers get some support, but many are small businesses that will simply have to close until this all blows over. What will the owners and their employees do to recoup lost income? How will this affect their spending habits and what will the impact be on the broader economy? While this situation is temporary, it will be painful in various ways for most Americans.

Government can help here with a “shock and awe” fiscal stimulus package. This would coordinate with the Fed’s action this past weekend to drop short-term interest rates to effectively zero. The Fed is also restarting its quantitative easing program (QE) employed during and after the Great Recession. The idea with QE is that the Fed pumps money into the financial system by buying hundreds of billions worth of Treasury and mortgage-backed bonds of various maturities. This, and other Fed programs, is the extra grease I alluded to earlier.

Policy coordination between fiscal and monetary stimulus is the missing link at this point. That’s what investors and the American people are waiting for (among other things, of course). Broad stimulus coupled with extremely low interest rates and QE would reduce some of the rampant uncertainly out there while we do whatever we need to do to let this virus play out.

In the meantime, markets are likely to stay extremely volatile. We almost need new words to describe the current environment since “volatile” and “uncertain” don’t seem to do it enough justice. Put simply, unless a major stimulus package (or a miraculous reduction in coronavirus cases) is announced, this market situation will get worse before it gets better. There could be such a package as early as today, so fingers crossed for a good one.

Buying opportunities could become plentiful should the markets take another leg down, so I’m preparing for that on your behalf. And if you’re wondering, fortunately my work for you doesn’t have to stop due to social distancing or even a shelter in place order. So long as the Internet keeps functioning, I have full access to markets, your portfolio, your plan, and well… everything.

Have questions? Ask me. I can help.

  • Created on .

Quarterly Update

Before I start on this quarterly update I wanted to offer a few words about the recent relief/stimulus package from Congress. Much ink has been spilled writing about it in recent days, so I won't go into the details here. Instead, feel free to reach out with questions. The short answer about whether or not you stand to benefit is... yes! You've likely heard about money going to individuals but there's also money available for small businesses and independent contractors. So, if you've been impacted financially by the coronavirus you need to look into your options. Now, on to my recap of a truly nasty quarter for the markets...

In what seems like a different world from our current vantage point, markets started 2020 by rising amidst a healthy economy and in the face of continued trade uncertainty and even presidential impeachment hearings. But as the first quarter (Q1) hit mid-February the situation changed dramatically. The quarter ended being one for the record books, and just about all the records were bad.

Fortunately (or unfortunately, depending on your perspective), the US economy began the year on solid footing. Housing was doing well, we were at so-called full employment, there were signs of a manufacturing resurgence, and risk appetite was high. Then out of the blue came the coronavirus outbreak that needs no explanation.

As of this writing there are over 300,000 confirmed cases (and rising rapidly) in the US and more than 1 million globally. The death toll continues to climb at the rate of about 5% of those infected. In response, many governments around the world began shuttering their economies and accepting the myriad tradeoffs between stay-at-home orders, self-induced recession, and larger loss of life. Governments and central banks crafted relief packages to help soften the emerging economic blow. In the US, Congress passed its largest ever fiscal stimulus at over $2 trillion. The Federal Reserve unveiled a slew of financial crisis-era tools and decreased short-term rates to zero to help prop things up. All of this in about six weeks; quite the quarter, to say the least!

Accordingly, markets around the world were extremely volatile and fell precipitously during Q1 before clawing back a bit at quarter’s end. Here’s a roundup of how major markets have performed so far this year:

  • US Large Cap Stocks – down 19%
  • US Small Cap Stocks – down 31%
  • US Core Bonds – up about 3%
  • Developed Foreign Markets – down 23%
  • Emerging Markets – down 24%

Read the rest by clicking the link below...

Continue reading

  • Created on .

Crisis Investing

It was Mike Tyson who said everyone has a plan until they get punched in the mouth. I’ve always liked that quote and it seems to pretty much cover the last few weeks, doesn’t it?

We plan for the future, for retirement, for how our investment portfolio is going to help us accomplish our goals. We plan to get our kids through college. And then that right uppercut comes from out of nowhere… bam! It leaves us feeling bloodied and dizzy, and wondering if there was any value in all that planning when life seems so uncertain.

Fortunately, planning does have value. One clear example is how the planning we’ve done helps provide a framework to evaluate your options during times of market crisis. It helps us triage, so to speak, when figuring out what if anything to do with your investments.

As I see it there are three groups of individual investors right now: The Spenders, the Almost-Spenders, and the Savers. Each group has its own triage framework to lean on and you need to know which group you’re in. This isn’t always an easy task, especially when the fear and anxiety we’re all facing makes it difficult not to join a fourth group, the Sellers.

All three groups have a challenge ahead of them, so here are some thoughts to help frame your decision-making. You’ll likely notice the recurring theme of having a plan, sticking to it, and not letting fear dictate your options. This is probably the best advice in difficult times even though it doesn’t necessarily make things any easier.

The Spenders –

You’re probably descending through various levels of anxiety while seeing your portfolio values drop. This is the money you’ve spent decades saving and it’s taking hits from all directions, including the money you’re withdrawing to live on.

During times of crisis it’s important for Spenders to revisit the details of their retirement plan. If I did the plan originally it included a “bear market test” based on retiring just before the Great Recession. How does this current situation compare? Does your plan require any tweaks? Test it and find out.

Where does spending money come from when stocks are down? Well, from bonds of course! If you’re feeling scared about the current market environment, please go through the following exercise and insert your own numbers. If you need the bond and cash amounts, just ask.

  • Add up your spending needs for the next year. Let’s say this is $80,000.
  • Subtract known sources of income, such as Social Security, any pensions, rental income, and so forth. Let’s say all of this together equals $60,000.
  • That leaves you with an expected $20,000 draw from your investment portfolio.
  • Now please divide the total amount you have in bonds and cash in your investment portfolio by that $20,000. This tells you, in back-of-the-envelope fashion, how many years you can “afford” to wait for stocks to recover.

Is the answer to your math question at least two years? Five? Ten? During the Great Recession it took investors 2-3 years to get back to normal if they did the right things, such as diligently rebalancing and not selling out of fear. How long do you think it would have taken had they sold stocks during the worst of it?

In other words, Spenders can use their bonds to fund their lifestyle while allowing their stocks enough time and space to recover. Two years is probably a minimum, but you likely have much more than that. Hopefully this provides a little piece of mind during very turbulent times.

The Almost-Spenders –

These folks are less than five years from retirement and are feeling a ton of anxiety right now. They’re in their peak earning years but are planning to start winding down soon. Does this crisis mean they should stop funding their retirement accounts? Does it mean shopping for a more comfortable desk chair and maybe an office plant because they’re now going to have to work longer?

The next few years will be critical for this group and they can’t afford to make mistakes. This would be true even in the best of market conditions. As above, they should revisit, update, and retest their plan based on current market values. Does the plan still hold up? If not, what changes can be made to allow for retiring on schedule? And it probably included assumptions for continuing to fund your retirement accounts. Prices today are at a discount. Now’s the time to keep buying if you can afford it, even if it’s uncomfortable.

The Savers –

Typically, these are younger investors who are trying desperately to manage their finances and pay down debt while still trying to save for their future. That’s a tall order anytime, but it’s made more challenging by a looming virus-induced recession.

If Savers find themselves unemployed for a time, they should avoid hitting up their retirement accounts to fund their living expenses. Easier said than done, I know, but the 10% penalty and taxes on top of realizing investment losses creates a huge hole to climb out of later.

Assuming they still have a job during this crisis, their framework right now is the simplest of the three groups. All they need to do is buy more, as much as they can reasonably afford. They need to put more money into their retirement accounts and buy more stock. Prices for high quality diversified mutual funds and index funds are 30+% less than they were a month ago and potentially moving lower. In short, there’s rarely been a better time than now to start ramping up retirement savings.

Have questions? Ask me. I can help.

  • Created on .

Fair to Middlin

As I was writing this yesterday morning, major market indexes had opened way down on virus anxiety and the relationship complexities between oil producing countries. So-called circuit breakers set to briefly halt trading during times of market stress had been tripped. Recession fears had quickly been rekindled amid an otherwise strong economy. In short, it was a “wheels are coming off” kind of Monday.

After a day like that, not to mention the past couple of weeks, the reasonable question is what on earth are we going to do about it? The answer, as you can probably imagine, is that we’re going to follow our plan. We’re going to focus on controlling what can be controlled. And we’re going to remain rational even as a growing number of people around us seem to be, well, losing their minds just a little bit.

What does this actually mean for your investments? What follows mostly applies to those clients who trust me to manage their investment accounts.

As we’ve discussed previously, we’ve positioned your portfolio to be diversified and, based on your plan, to be able to weather market craziness. This doesn’t mean you’ll experience none of the market’s downside. We all know that’s not possible when we’re also trying to get the upside.

Instead, your market exposure becomes a matter of proportion. If, say, the stock market falls by 10% and your portfolio has 60% of it’s money in stocks, you’d expect to fall by about 6%. Diversification and portfolio construction can help push these numbers a bit in your favor, going down even less and rising a little more, but there’s no free lunch here. I know you know that, but it’s helpful to remind ourselves at times like these, right?

What also helps is the other 40% (or whatever your portion is) being invested in “core” bonds. These are primarily Treasury bonds issued by the government and other bonds issued by high quality companies. Now, investors fearfully selling stocks often flock to bonds, but the buying in the past few weeks has been pretty extreme. Core bonds are up over 6% so far this year, well beyond typical expectations.

Bond prices have risen so much that yields (the implied investment return for new buyers) have hit historic lows almost daily for the past couple weeks. Every Treasury bond from one month out to 30 years yielded less than 1% yesterday and the 10yr Treasury, a key benchmark, fell to less than half that. Would you lend the government money for 10 or even 30 years for that piddly amount of interest? No way. You’d only buy bonds like that out of fear, or perhaps because you’re an institution and simply must put your cash somewhere. In short, panic selling of stocks begets panic buying of bonds.

The combination of stocks falling while bonds are rising means that, proportionally, your returns are better than the stock market over the past several weeks. We’ve made assumptions about this relationship within your plan and have stress-tested various “bad” scenarios as well.

The following examples are from a typical client’s actual experience during the month of February and the first week of March. You’ll see how the green line (the client’s portfolio) hovers within the other colors (each of which is a market index). Essentially, this is what we’re shooting for over the long term and during nasty phases like the one we’re in now. The adage about investing being a marathon (even an ultramarathon where the middle is a great place to be) and not a sprint absolutely holds here.

This is important because the economic outlook is evolving rapidly. Several analysts, including my research partners Bespoke Investment Group, are now calling on the powers that be to provide immediate economic stimulus to avoid a recession this year. This abrupt change to the outlook was brought on by continued fears of contagion, both literally regarding the coronavirus and figuratively regarding economic impact from our neighbors’ actions (or inaction) to avoid it. Recent moves by OPEC and Russia that are driving down the price of oil don’t help the mood either.

So unfortunately, this kind of volatility could persist while these issues shake out. In the meantime, I’ll stick to our plan and manage your portfolio accordingly. This can, and probably will, include some buying of stocks assuming they fall sufficiently. This isn’t an exercise in trying to “time” markets but is part of my disciplined rebalancing process.

Have questions? Ask me. I can help.

  • Created on .


  • Phone:
    (707) 800-6050
  • E-Mail:
    This email address is being protected from spambots. You need JavaScript enabled to view it.
  • Let's Begin:

Ridgeview Financial Planning is a California registered investment advisor. Disclaimer | Privacy Policy | ADV
Copyright © 2018 Ridgeview Financial Planning | Powered by AdvisorFlex