April 6th, 2020 –

I started to travel by air when I was a child and absolutely loved it. In addition to some epic family adventures, my family would take me to the airport, walk me to the gate and send me off by myself to visit my grandparents in Arizona. I don’t remember whether I had to change plans along the way; but it mattered not, I was an adventurous young man and loved navigating my way around strange places such as airports or hotels. It was clearly a different time. 

Fast forward to today, and I cannot stand air travel. Something happened, as I grew older. I battle irrational fear each time I have to travel which, unfortunately, is quite a bit. In addition to the general frustration of travel, I do not enjoy turbulence at all. There is something about flying 40,000 feet in the air when the plane suddenly hits a pocket of air, causing us to shake violently, that I do not find enjoyable. Like many, I always look to the faces of the flight attendants. I have yet to see one who looks nervous, and that brings me an immediate sense of calm. I like it even better when the pilot comes on to talk us through the turbulence, and I always appreciate it when they give us a heads up that an invisibile “air pocket of death” is coming. 

A few months ago while flying, the turbulence was like nothing I had ever experienced. While we were warned ahead of time it would be bumpy, there was nothing reassuring about the perpetual up and down and back and forth. I was sweating, holding onto my arm rests with all my might and continuously reciting the Lord’s Prayer. Nothing was working. After a few minutes, the pilot came over the loudspeaker and calmly said, “Doooon’t worry folks, we’re almost through it and this is a big-ole, strong American made airplane. We’ll be fine.”

Just like that, I felt better. I let go of the arm rests, took a deep breath and immediately felt a sense of calm. He was right, we would be fine and it would be OK. We were almost through it and were on a strong, American made airplane. The turbulence continued, but my nerves calmed considerably. 

I have heard from many of you that you’re finding my writing helpful. So, I thought I would lay out our game plane for the next coming weeks so you know precisely what our course of action will be. Clearly, it is a fluid situation and things can change, but I wanted to open up the playbook a bit so we can all be on the same page. 

  1. Rebalance – As I have mentioned on numerous occasions, the first line of defense in any market decline is one’s asset allocation, or the maximum exposure at any one time to stocks. While this is often age based, what we’ve observed during these times is that an age based risk tolerance doesn’t always correlate with a risk temperament. Despite someone desiring a 60% exposure rate to stocks, the reality is that it should be more like 50% or even 40%. Adjustments to allocations are just fine. What isn’t fine is reducing them during declines but increasing them during ascents. This results in buying high and selling low or precisely the opposite of a successful investment strategy. We will always have a tactical element to our portfolios and it is from this area that we will make decisions regarding exposure levels, such as reducing exposure during times of market overvaluation (2019) and increasing exposure during times of market undervaluation (TBD??). When we experience such a dramatic market decline, as we have, it will throw off our general allocations quite a bit. For example, while we may desire to have a 5% position in the financial index, due to a decline, this may have resulted in a 4% position. While most would look at this as a trivial 1% reduction, the reality is that it is a 20% difference in our desired target. Since there are now no trading fees, at all, and little to no tax consequences, we will soon pursue a rebalance of our sector index funds to bring these back in-line with our longer term target allocations. Do not be alarmed by this rebalance. 
  1. Gold – Gold has been a staple in our portfolios for well over a year now, and it has definitely been one of the bright spots, excuse the pun, helping us to weather this storm. From a macro perspective, the investment has never made more sense, as our government looks to supply endless amounts of money to this current economic situation, both through direct consumer stimulus and forgivable business loans. While, at present, the world craves US dollars, the massive amount of QE will eventually result in an inflationary situation which will create further demand for precious metals. Traditionally, we have held a position in both the Gold Miners (GDX) as well as the Gold ETF itself (GLD). We are going to be increasing our exposure to the metal or (GLD). Our objective here is to continue to provide a hedge against market volatility through what has traditionally been a stable asset class, as well as participate in the coming inflation which we believe will result from the liquidity injection we’re seeing into the system. 
  1. Excess Cash – Depending on your allocation, at present, we hold significant amounts of excess cash across all accounts. For example, our moderately aggressive allocation, which is targeted to be upwards of 70% invested, has current equity exposure of 40% not including gold. In this example it means that, in addition to the standard 30% in fixed income or bonds, this allocation has an additional 30% in cash which can be used for buying when deemed appropriate. Since this cash is not earning us anything, while also not losing value, we do eventually desire to put this back to work. This tactical portion of our portfolio will be slowly redeployed and, more than likely, we will keep it super simple choosing to focus only on a broad index such as the S&P 500. I believe the area we’re in presently is a spot where the market is becoming attractive and, despite headlines, accumulated data points to a slow down in this virus spread within major metropolitan areas by the end of April. It is my view that, when we finally get the green light to leave our homes, the market will have already priced this in and be much higher. 

In summary, our playbook is rather simple and I believe extremely prudent. We will look to rebalance the inventory we do have and slowly redeploy the cash on the sidelines, where and when appropriate. 

For those interested in further reading, this paper regarding social distancing and its effects on the virus is one of the best I’ve come across. Unlike many other papers, that have exponentially grown in number citing the infection and mortality rate with no end, this looks at the actual data and the positive impact of social distancing and the quarantine we’re all currently going through. It helps keep things in perspective. 

Until next time