Plan of Attack
Published On: March 6, 2020
Written by: Ben Atwater and Matt Malick
Given the coronavirus-inspired market meltdown of late, we want to assure you that we have a coherent plan of attack for dealing with market volatility.
Although action is important, doing no harm is more important. The reasons are simple. Stocks are a volatile asset class that historically delivers high long-term returns but washes out periodically and for reasons that nobody ever predicts.
Just as no one predicted coronavirus, no one will predict the rebound either, so to vacate the market in times of stress is to effectively give up on your long-term return potential. If we bail on stocks now, we’re all but guaranteed to miss the inevitable rebound.
Our clients are properly allocated to stocks and bonds based on their long-term goals and cash flow needs. In the case of a more prolonged downturn, we’d look to our fixed income positions to dollar-cost-average into stock positions or provide liquidity for distributions.
Bonds are terrific sources of liquidity right now. The 10-year United States Treasury yield has fallen below 1% (0.761% now) for the first time ever. This is truly a historic development. Given the low yields on bonds, we are planning to keep higher cash balances in many balanced accounts. These higher cash balances will give us the opportunity to provide clients needed liquidity and the chance to buy more equity exposure if markets continue to decline or more fixed income if yields rise.
Given low bond yields and higher than average stock valuations, we believe it is a mathematical reality that investors will need to take advantage of buying market dips and market panics in the coming decade.
Bond yields are simply too low to accomplish most investors’ long-term goals unless we use bond positions strategically. To more effectively do this, we believe, for now, it is advantageous to hold somewhat higher cash positions in balanced accounts. However, as the current downturn proves, bonds are still an integral part of any balanced investment plan.
For clients who have outside money to invest, now is a great time to be in contact with us. We’d strongly encourage buying during market wipeout days. The downturn could persist for months or it could end today, nobody knows. But if you’re a long-term investor, it’s hard to argue against buying high-quality companies when their stock prices have fallen 15%, 20%, 25% or even more.
Coronavirus clearly presents tremendous headline risk. We believe it’s also likely to cause a recession here in the U.S. and across the globe as supply chains are disrupted and demand takes a hit. That said, governments should ultimately deliver robust government stimulus in order to contain the spread of the virus and minimize the economic slowdown. For this reason, the ultimate snapback will be unexpected and powerful. We will stay invested and, where prudent, add to equity positions.