Historical Perspective and the Opportunity

March 25, 2020

For many this time of extreme equity market volatility can be unsettling to say the least. We see our portfolios decline in market value and fear they will continue falling or taking forever to recover. Rationally we know that many businesses continue to function and many will eventually thrive again as the stimulus (money!) governments are beginning to release takes effect. However until that stimulus begins to work, the news will typically be bad and challenging for us to remind ourselves we’ve been through times like these and equity markets have historically recovered.

For those of you that have mentioned you would like to take advantage of the opportunity the current market represents, click on this link to read my perspective of this market and how you could take advantage of it.

Over the past 25+ years since I first started my financial advisory career, the times that felt somewhat similar to today were the Asian Financial Crisis (1997), the period post 9/11, and the Global Financial Crisis (2008-2009).  All of these periods included extreme volatility and an uneasy sense of uncertainty around what the future would bring in terms of economic growth, consumer confidence, and government and regulatory actions. Each experience began for different reasons. What was also evident in each of these periods was an equity market environment that included indiscriminate selling of companies almost without any regard to their fundamentals (ie strong balance sheets, good revenue potential, etc).  While some companies and industries would clearly be impacted in the medium to long-term by the aftermath of these events, there were many other companies that still held their strong competitive position and the environment at that time would prove to be a fairly short-term setback. Regardless, many of those companies were sold off just the same without regard to their long-term prospects or competitive positioning.

The market environment over the past month has shared many of these same characteristics.  What started out as a somewhat rational differentiation between the companies that will be impacted by the virus from those that will likely be relatively immune from it, has evolved into widespread selling, particularly during the last few weeks, where there seemed to be very little rhyme or reason as to what was being sold.

Periods of extreme volatility such as this have historically been an opportunity to both deploy cash in portfolios as well as rotate into well positioned companies that are being overly sold for what they believe to be irrational reasons.  Investment managers managing our portfolios have been doing exactly this for the past few weeks and will likely be doing more of the same as the volatility continues.

While all investment managers who have experienced previous markets like this remain very confident in the long-term, we all need to recognize we are likely in for continued volatility as the world comes to grips with COVID-19 and finding a solution. However, most believe the prices quality equities are selling for at this time will not be seen again when the recovery begins.

To that end, many of my clients who have cash not needed in the short term and are comfortable it remain invested for 3 or more years have asked when they should begin purchasing. The following is my recommendation for an investment strategy in this market.

First you must understand there is no way to pick a market bottom and beginning to invest now may result in additional market declines before the market recovers. To mitigate the risk of investing slightly early, I recommend dollar cost averaging into an allocation of global equities over five months. Why five? just a pure guess as to how many months it will take for the world to adjust to this new normal and a recovery to begin. If it takes less time we can speed things up.

Second, the amount you invest should still be considered long term money or amounts you will not need over the next three years. The equity market may very well recover sooner but your expectation should be to hold the investments at least this length of time.

Exactly what we invest in will be based on each clients’ current portfolio but will typically be an allocation of global equities. A Tax Free Savings account should be the account of choice first and if already maximized, then a non-registered open account.

Should this be of interest, please give me a call.

Richard Yasinski