April 2020 Newsletter

“Everyone has a plan until they get punched in the mouth.”
Mike Tyson, Former Heavyweight Boxer

“The important thing about an investment philosophy is that you have one you can stick with.”
David Booth, Chairman, Dimensional Fund Advisors

“Most decisions we make are under uncertainty—they’re heavily influenced by luck, by hidden information. We fool ourselves into thinking that it’s not so uncertain.”
Annie Duke, Author of Thinking in Bets

“As Nassim Taleb has argued, inadequate appreciation of the uncertainty of the environment inevitably leads economic agents to take risks they should avoid.”
Daniel Kahneman, Psychology Professor Emeritus, Nobel Prize Winner Economics

Coronavirus Update

We know this is a very trying, and scary time and we hope that you and your families continue to remain healthy and safe. We continue to monitor the global pandemic daily and expect continued volatility with the release of new information globally and nationally. Following are some of the current thoughts on COVID-19.

• “We are in the 2d inning of a 9-inning game…There’s a lot of transmission left to come. It could even stay through the summer, into the fall, well into the following year.”  Dr. Michael Osterholm, Founder of University of Minnesota’s Center for Infectious Disease Research and Policy.  https://twitter.com/mtosterholm @mtosterhom
• “The Harvard modelling group led by Marc Lipsitch has suggested that transmission might slow over the summer, but that it will be a small effect.” https://twitter.com/mlipsitch @mlipsitch
• “If we restart economic activity, but we don’t substantially reduce viral spread, businesses may reopen, but consumers may be nervous about venturing out and engaging in activities. And our economy is one that’s led by the consumer.” Dr. Scott Gottlieb, Former Commissioner of FDA. https://twitter.com/ScottGottliebMD @ScottGottliebMD
• Gilead reported this morning (April 29, 2020) promising developments for their product remdesivir.  https://www.cnbc.com/2020/04/29/gilead-reports-positive-data-on-remdesivir-coronavirus-drug-trial.html
• However, a separate randomized, double-blind, placebo-controlled, multi-center trial also published today (April 29, 2020) in the British medical journal The Lancet showed no statistically clinical benefits of remdesivir versus placebo. https://www.thelancet.com/journals/lancet/article/PIIS0140-6736(20)31022-9/fulltext

Market Update

Market Declines and Coronavirus

The world is watching with concern the spread of the new coronavirus. The uncertainty is being felt around the globe, and it is unsettling on a human level as well as from the perspective of how markets respond.

It is a fundamental principle that markets are designed to handle uncertainty, processing information in real-time as it becomes available. We see this happening when markets decline sharply, as they have recently, as well as when they rise. Such declines can be distressing to any investor, but they are also a demonstration that the market is functioning as we would expect, constantly adapting to new news.

Market declines can occur when investors are forced to reassess expectations for the future. The expansion of the outbreak is causing worry among governments, companies, and individuals about the impact on the global economy.

The market is clearly responding to new information as it becomes known, but the market is pricing in unknowns, too. As risk increases during a time of heightened uncertainty, so do the returns investors demand for bearing that risk, which pushes prices lower. Our investing approach is based on the principle that prices are set to deliver positive future expected returns for holding risky assets.

We cannot tell you when things will turn or by how much, but our expectation is that bearing today’s risk will be compensated with positive expected returns.  Some of those changes have occurred in the last few weeks. That has been a lesson of past health crises, such as the Ebola and swine-flu outbreaks earlier this century, and of market disruptions, such as the global financial crisis of 2008–2009. Additionally, history has shown no reliable way to identify a market peak or bottom. These beliefs argue against making market moves based on fear or speculation, even as difficult and traumatic events transpire.

Importance of Diversification

While this quarter has not been pleasant, and this is an unprecedented time, we continue to believe in the benefits of diversification.  Part of diversification is making sure an investor has some assets that have a higher probability of lessening some of the risk of the portfolio. Below you can see these portfolios illustrate the performance of different global stock/bond mixes and highlight the benefits of diversification. Mixes with larger allocations to stocks are considered riskier but have higher expected returns over time. Higher risk allocations also experience higher volatility. As you can see none of these are straight lines.  Also, in the returns shown at the beginning of the newsletter, safe US Treasury bonds actually protected portfolios by increasing in value while stocks declined.

While the volatility can be unsettling, the image below, from Vanguard, highlights the importance of remaining invested for the long-term. We do not know when the market will be positive or negative in a day, week, month or rolling ten-year period, but if you have a plan and stick to it, we believe the long term expected outlook is positive.

Just as we cannot predict when the market will go 1, 3 and 5 year down, we cannot predict when the market will go up either. Below is a graph from Dimensional depicting average US market returns following periods of steep declines. It is important to notice that following periods of steep downturns, that have been on average strong up-swings.

Although no one knows and there is great uncertainty, broad market indices tracking data since 1926 in the US shows that stocks have generally delivered strong returns over one-year, three-year, and five-year periods following steep declines.

Just one year from a decline of 10% or 20%, returns were higher than the long-term average of 9.6%. And the return after a 15% decline was within half a percentage point of the average.

Looking three and five years later also shows annualized returns averaged higher than the long-term average.

Another way to look at this is through the charts below, published by BlackRock. You can see the worst days, months and three months for S&P 500 since 1950 with the following 1-year return. On average, the S&P 500 has been up ~20+% following its worst days, months or three-month period of its worst returns since 1950. This again highlights the importance of remaining in the markets during periods of negative returns.

Importance of a Plan

We know this period of negative returns can be painful, but we remain confident in our diversified portfolios alongside your financial plan for the long-term. We remain objective and independent in our approach and continue to talk with and follow the leading academics in finance.  As we consult with Dimensional, Vanguard, BlackRock, Goldman Sachs and Avantis, among others, we will continue to seek the best of advice from the leaders in both investing as well as academic finance to give our clients an independent and objective view of the best way forward.

Cyber Security Note

A quick note on cyber fraud right now.   We will never email you asking for personal information.  Also, here is a good resource on how to protect yourself against cyber fraud during this COVID-19 crisis and at all times.  https://staysafeonline.org/covid-19-security-resource-library/

Stay safe, and please reach out with any questions.

Best,

Mike and Emily