LESSONS LEARNED
An early look at what we’ve learned from the tumultuous start to 2020
“May you live in interesting times.” This oft-cited phrase is what I think of as I look back on the past few months. By all accounts, we are truly living in interesting times—perhaps more interesting than you or I prefer. Here are a few examples to explain what I mean:
- February brought us an all-time record high for U.S. stocks [1]
- Shortly thereafter, we saw the largest single daily percentage loss in stocks since 1987 [2]
- But soon after that, we also saw one of the largest single daily gain in stocks in nearly 87 years [3]
- Oil prices actually went negative as the capacity to store barrels ran out [4]
- Interest rates dropped further and short-term U.S. treasuries briefly turned negative [5]
- Unemployment in the U.S. skyrocketed to the highest levels since the Great Depression [6]
- Congress passed the largest stimulus package, with more programs likely on the way [7]
What is an investor to do in this environment, especially in light of these seemingly unprecedented times? Instead of trying to predict what may unfold in the weeks and months ahead—a futile exercise in my view— I thought it would be timely to reflect on some early lessons learned in hopes that it better prepares us for whatever the future may bring.
IT DOESN’T PAY TO PANIC
The past few months have been challenging for investors due in large part to the speed by which the markets have reacted to new information. According to CNBC[8], the CBOE Volatility Index (commonly referred to as the “VIX” index) surpassed its peak set in November 2008. But this extreme market volatility—both up and down— caused many investors to flee to the safety of cash, often triggering unnecessary tax and costs. For most who stayed invested however—either intentionally or due to paralysis— they were generally rewarded as April delivered a strong double-digit rally for U.S. stocks. The lesson learned is that it typically does not pay to panic.
THE VALUE OF PLANNING
Investing without a plan is akin to getting on a plane without a destination. In times like these, I’ve found that investors who have embraced planning tend to have a better experience. The planning we do assumes that we will encounter periods of sharp declines—similar to the what we’ve experienced this year. I don’t know about you, but when a pilot tells me in advance that we may see turbulence, I feel a lot calmer when it does occur. Planning can add value beyond investment returns; it can lead to a better investing experience as well.
MARKET TIMING IS HARD. REALLY HARD.
It may seem like a distant memory now, but 2019 was one of the best years for stocks and bonds, ever. And few experts predicted those standout returns. Similarly, I’m not sure anyone predicted the economic, health, or financial events that have transpired thus far in 2020. In conversations with investors, I’m often told that “they have a gut feeling” about which way the market will go in the days ahead. While I understand and can appreciate listening to your own intuition, attempting to time the markets has proven to be futile for even the most sophisticated investors. Even Warren Buffett, arguably one of the most talented and successful investors in history said, “We have no idea – and never have had – whether the market is going to go up, down, or sideways in the near- or intermediate-term future.” The lesson here is to avoid timing the market and instead focus on what you can control; your time horizon, your appetite for risk, your emotions, and your plan.
WHEN THE TIME COMES TO “BUY LOW” WILL YOU HAVE THE COURAGE TO DO SO?
It’s also common to hear investors talk about wanting to wait for a downturn to put extra cash to work. But when the markets are in freefall, it can seem as though markets won’t ever recover. Experience tells me that for even seasoned investors, buying when markets are plummeting is unnatural. I generally prefer to adopt a systematic approach for putting dollars to work over time to help take the emotion out of the decision. The lesson here is that buying low never feels good, but if you wait for the news to improve, you’ll have likely missed the best opportunities.
WE’VE SEEN THIS MOVIE BEFORE
Lastly, when markets decline, investors often lament to me that “this time is different.” And quite frankly, they’re right. Every market downturn is usually caused by a different event. In 2002 it was the tech boom, in 2008 it was subprime mortgages, and 2020 we will attribute to COVID-19. And while each of these causes have indeed been “different,” the events that unfold afterwards tend to be pretty similar, prompting me to reply: “but we’ve seen this movie before.” Here’s my opinion on how this movie will end—time will tell if I’m right. I’m confident that in time, businesses, schools, religious centers, restaurants and even sports arenas will reopen, and we’ll adjust to a new normal. More companies will innovate, adjust, and again return to profitability, thus pushing markets higher. It won’t be without fits and starts, policy change, and hardships to be sure. But I believe we’ll climb higher.
What’s with the confidence, you ask? It’s simple. At the end of the day, I believe that markets rise because of our collective desire to better ourselves and our communities through hard work, innovation, and faith in tomorrow. I’m choosing to stay positive—I hope you do too.
Sincerely,
Jeff DeLarme, CFP®
Registered Principal, Financial Advisor
Disclosures
Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. While familiar with the tax provisions of the issues presented herein, Raymond James financial advisors are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. The information in this writing has been prepared from sources believed to be reliable, but is not guaranteed by Raymond James Financial Services or DeLarme Wealth Management and is not a complete summary or statement of all available data necessary for making an investment decision. Any information provided is for informational purposes only and does not constitute a recommendation.
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Any opinions are those of DeLarme Wealth Management, and is not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected individual investor’s results will vary. The CBOE Volatility Index® (VIX® Index®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices.
Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. DeLarme Wealth Management is not a registered broker/dealer, and is independent of Raymond James Financial Services.
Sources:
[1] https://www.cnbc.com/2020/02/19/stock-market-wall-street-in-focus-amid-coronavirus-outbreak.html
[2] https://us.spindices.com/indexology/djia-and-sp-500/sizzlers-and-fizzlers
[3] https://us.spindices.com/indexology/djia-and-sp-500/sizzlers-and-fizzlers
[4] https://www.bbc.com/news/business-52350082
[5] https://www.cnbc.com/2020/03/25/negative-rates-come-to-the-us-1-month-and-3-month-treasury-bill-yields-are-now-negative.html
[6] https://www.nytimes.com/interactive/2020/05/08/business/economy/april-jobs-report.html
[7] https://www.bbc.com/news/world-us-canada-52070718
[8] https://www.cnbc.com/2020/03/16/wall-streets-fear-gauge-hits-highest-level-ever.html