Steve P. Phillips, CFP®

Senior Wealth Management Advisor

Disciplined Investing in Distressing Times

What a change three months can bring. Back in April, Greenleaf Trust released a special Perspectives newsletter edition to address the rising concerns around COVID-19 and its impact on the economy and markets. At that time, domestic equity markets (as measured by the S&P 500) had experienced a 34% decline from market peaks on February 19 through the market trough on March 23. Investors, including our clients, were left shaking their heads at how their equity portfolios could lose so much value so quickly. After all, it took the 2008 financial crisis nearly twice as long to reach such a steep decline.

Within that edition was an article penned by Greenleaf’s Chief Client Officer, Dan Rinzema, entitled “Wealth Management is Crisis Management.” This article, which can be found on Greenleaf Trust’s website for reference, discussed some of the strategies we were employing on our clients’ behalf to add value during the recent downturn. This included items such as rebalancing, tax loss harvesting, potential Roth conversions, and the chance to refinance outstanding mortgages at record low interest rates. One of the most impactful strategies outlined happened to also be the simplest, though perhaps the most difficult to perform: staying calm and disciplined through the market volatility while focusing on long-term wealth creation and growth.

Since that time, markets have rebounded at a surprisingly fast rate. As of the writing of this article, the S&P 500 is trading around 3,131. This marks an approximate return of 40% since late-March lows. Interestingly, this also brings domestic markets close to where we began 2020 and in positive territory from one year ago. It should be noted that while the S&P 500 has had a strong recovery, medium and small size companies in the US and international markets have trailed domestic large caps substantially for the year. 

Ironically, it is now the exact opposite question we are receiving from clients. Rather than the concern about how long it will take for markets to recover, it is concern that markets have recovered too quickly, and when will the next crash hit? All of this leads back to the importance of disciplined investing. While there were risks to the economy in late 2019 as the US continued to get further along in the business cycle, there were very few economists, if any, who were forecasting a global pandemic caused by a novel virus which would send the globe into a recession within several months. Similarly, given how stark the situation looked at the end of March, with massive amounts of the economy shut down and no viable medical solution to the virus, few economists were predicting we would have such a quick recovery in US equity markets. And herein lies the problem: if the experts who spend their entire lives studying markets and economics can’t tell when major volatility is going to affect markets, who would be able to do so successfully?

Part of our role at Greenleaf Trust is to be a financial coach to our clients. Countless times we have had conversations with clients who want to go to cash, or conversely hold on to cash, rather than be fully invested in markets. This is a normal and understandable emotional reaction. Who wants to risk decades of hard work to potentially sacrifice retirement, philanthropic, or generational wealth transfer goals? While these are legitimate fears, it is our task to a) establish an appropriate asset allocation for each client on the front-end and adjust that allocation over time for life changes, and b) help walk our clients through the distressing times of extreme market volatility, while capitalizing on value-add opportunities during those times.

As we have mentioned in previous articles, the data strongly suggests that successfully timing markets is an almost impossible task. As the adage goes, you have to be right twice, both in terms of when to sell out of markets and when to buy back in. The below chart shows the extreme dangers to long-term wealth creation that this type of market adventurism can entail. The chart illustrates the returns on $10,000 invested in the S&P 500 over the past 20 years. As you can see, remaining fully invested earned returns in excess of 6%. The second example shows how the same portfolio would have been impacted if you missed the 10 best days in the market over that time span. The portfolio would have been more than halved in value, with a return of only 2.44%. To keep this in perspective, there have been 7,305 calendar days in the past 20 years, with markets being open for roughly 5,060 of those days. It only took missing 10 of the best days during those 5,060 trading days to decrease the ending value of the portfolio by more than 50%. This issue compounds itself even further when you factor in that a large percentage of the best trading days directly follow some of the worst trading days in markets, when investors would presumably be the most worried and the most ready to move to cash.

It is also important to remember that while news commentators constantly talk about equity returns, the average investor has a diversified portfolio consisting of non-correlated assets, such as fixed income, alternatives, or cash. At Greenleaf Trust, we spend a great deal of time at the beginning of the relationship getting to know our clients intimately. This includes learning about their goals and desires for their wealth, their income and associated spending habits, and every other detail that is important to a client’s overall financial picture. It is armed with this information that an appropriate asset allocation is agreed upon at the beginning of the relationship, which ideally weds a client’s ability to take on risk with their personal risk tolerance. These portfolios are established with a long time horizon in mind, knowing there will be times of great expansion and times of recession within the economy.

We know the past few months have been a tumultuous time for our country. A global pandemic, volatility in equity markets, numerous demonstrations protesting injustices against minority communities, and large portions of the economy shut down. It is normal to feel fear during these times. But it is our job to remind all our clients on a regular basis that remaining disciplined reduces costly mistakes that can cause irreparable financial harm, and creates the greatest opportunity for long-term wealth accumulation. That advice stands today as much as it did three months ago.

COVID-19 Updates

As of August 2

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