The stock market, as measured by the S&P 500, just had its fastest drop of 30%, ever. The others in the top 5 are 1934, 1931, 1929 and 1987. That’s some scary company to keep. Only one of these was more short-term in nature, the 1987 crash. Should we heed the Great Depression company that we are keeping, or could this be a steep and short recession?
The truth is, nobody knows. There are so many unknowns that to be certain would be foolish. Most of the financial advice industry will admit this. We’ve seen the main mantra of buy and hold further championed over the last decade. It has proven to be a very solid strategy, if one followed it correctly. I suspect for those who are years away from retirement, sticking with this strategy will show a nice reward at the end of the day.
However, it’s far easier said than done. Obviously, the younger you are, the more time and continued ability to buy the discount helps you stay the course. It’s a whole different story when you know you’ll never get another paycheck, and you need at least $1 in your account the day you die.
There are countless stories of those who sold all their stocks during the 2008 financial crisis, and either never came back, or did so at much higher prices. Many now look back and wished they hadn’t panicked.
Along with this championed mantra has been the proliferation of index funds. Companies like Vanguard have proven that using low-cost index funds is the simplest and easiest way to do better. The vast majority of funds that you pay extra for in an effort to outperform the index have come up short. It’s been a great decade for low-cost investing where you just stick with your set investment portfolio. Will it continue to be? Is this still the best strategy going forward? Again, nobody knows, but I have some opinions on the matter.
Those of us who use a more active investment approach have not performed well as a whole. Getting more conservative on the downside has turned out to be bad move for the last 11 years. Many investors now have been groomed to not panic, and to buy the weakness. Central banks have created an environment that you absolutely don’t fight their support.
That scares me when you know that the market is best at proving the most people wrong. It worries me that we have so many unknowns with the virus and the economy. How will the economy start back up? Will buying behaviors be severely changed? Will a vaccine be administered to the whole world in 2021 or 2022?
If this ends up being as bad as the financial crisis of 2008, or worse, then the market still has considerable downside. If it were to match the peak to trough of 2008, then we are looking at about 23% more downside. Typically, it takes around 18 months for stocks to start a recovery. Having lived and invested through the past two major bear markets, I still believe that a more active approach can better help people reach their goals. That a few key decisions to reduce your risk during recessionary times not only help you keep more of your hard-earned money, but provide better state of mind and quality of life
At Stewardship Capital we have accomplished our goal of losing less during the current decline. We have a plan to put that money back to work. Whether that’s at a higher price than today due to confidence the worst is behind, or at lower prices. We can’t guarantee that the benefit derived from our actions during the crisis will prove to be better going forward.
What I can say is that I have performed well in both up and down markets. I think buy-and-hold is a good strategy, but I do suggest friends and family do what I do. I believe a combination of low-cost index funds, with a core portfolio that stays invested through thick and thin, along with a portion of your account that can be used to push or pull off the accelerator to navigate different market environments makes more sense.
There will be times when it does better or worse than the standard comparison of buy and hold, but I believe in the performance of this philosophy over the longer term. I see the relief of stress that it gives people during the hard-hit times. I believe we will come out on the other side of tough times even stronger mentally, spiritually, and economically.
(Past performance is no guarantee of future results. Advice is general in nature and not intended for specific situations)
Aaron Pickert, CRPC, is chief investment officer at Stewardship Capital in Independence.