March 12, 2020 – 10:30 –
From the SEC Tournament to the NBA, the coronavirus is now threatening the daily lives of all Americans whether they are ill or not. Unfortunately, last night’s presidential address didn’t do much to calm the markets, and the additional travel ban on flights from Europe is only adding fuel to the fire.
I continue to read as much factual information as I can regarding the virus, and there are a few common themes. There is little doubt that the virus is extremely dangerous for those with poor immune systems and that factor may include a vast majority of seniors. The cessation of various events, such as sports or schools, is an attempt to slow the spread and thus save those most susceptible from contracting the virus. The strategy has been proven to be successful in parts of the world such as Singapore and South Korea, where very quickly the country’s actions led to a decline in cases and a significant reduction in mortality. On the other hand, Italy seems to have taken an more lackadaisical approach; and, as a result, the numbers are growing rapidly. There is a growing argument that the US does not have the ability to slow the spread, and the concern is that we will see a significant increase in cases. The other side of the argument is that, because we have a better health care system, better response times, we will move past this quickly. Not a single person really knows how it will play out.
While I continue to ponder the greater implications for our society as a whole, I must continue to review the situation through the lense of an investment manager. As you can imagine, I’m having lots of conversations with folks and discussing our views and action steps. At present, I continue to review daily our overall client cash and allocation position. In addition to actual non-invested cash, our clients hold an investment in the Schwab Value Money Market Fund, and, in most cases, multiple 1, 2 and 3 year US Treasury Bonds. One thing I learned over the years is never to chase yield. I’m very pleased to say we do not own fixed income that is exposed to the high yield or ‘junk’ market. If you log onto Schwab, and want to get a quick glance at your overall ‘non-invested portion’ of your account, look through the positions and make sure to include the Money Market, Treasuries and, in certain instances, CDs etc. Sometimes a quick glance at ‘Cash’ can be a bit deceiving.
Outside of our cash and fixed income, for the vast majority of our managed accounts, we hold Index Funds of various sectors or entire markets. I’m very pleased with this investment approach as I am confident in the fact that when this panic subsides, and it will subside, markets will come back. While certain individual companies may not, the entire sectors and broad market will.
There are two vastly different questions I’m getting that I will address here.
The first is regarding putting cash to work here. In certain instances folks may have idle cash that they have been patiently waiting to invest. I’m answering the question as follows. Please understand, this is not specific advice as this letter reaches thousands of readers. In the case of an individual who has been waiting for a better investment opportunity and has idle cash, stocks are much cheaper than they were just a few days and weeks ago. In the case of someone investing with a long time frame, I would definitely look to allocate funds into diversified index exposure at these panic levels assuming these are long term commitments. On the other hand, I would most definitely issue a caution to someone who is just trying to invest to make quick money on the decline. While the market is extremely oversold and due for a significant bounce, the ripple effects from this virus and the economic backlash is uncertain, and it may take many months to work through the system. While you may get lucky timing a bounce, if your time horizon is any shorter than 5 years, I would not commit new capital.
The other question I’m getting, is whether or not someone should cash out and move completely out of the market. My answer to this is also two-fold. While the current decline is horrible, I feel confident in all our positions and cash levels across our client accounts. One of things we’ve been working hard to do, over the last few years while times have been good, is to check and recheck that all our clients have appropriate allocations. Now we’re experiencing the appropriateness of our allocation design. Altering this strategy, in the midst of chaos and panic, would not be prudent. At some point, this virus will subside, people will once again be leaving their houses and attending events. The market will come roaring back and the cash we do have will be used to buy new opportunities. On the other hand, there is a risk tolerance level that I refer to as sleeping risk. Regardless of your time horizon, the financial and retirement plan we’ve created, your required rate of return or the like, if this decline has you filled with panic with regards to your investment accounts, then another hard look at your allocation and the possibility of raising further cash may be warranted. If you find yourself in this camp, let’s discuss it and review any action steps necessary.
From my vantage point, as hard as it is to do, I am patiently waiting for this to subside. I am diligently reviewing portfolios, and updating financial models for new opportunities. As I mentioned yesterday, there will be new and incredible opportunities through this challenge and, at some point, the bargains will be too cheap to pass up.
I will continue to touch base regularly. In addition, our office staff is always available for you during this time or any other. I appreciate the kind comments from so many of you. Please know that these chaotic times are precisely why I do what I do. I realize this is a scary and unsettling time in our country, but I am confident we will get through it and be better for it.
Until next time