Q1, 2020 MARKET SUMMARY

Here you can view DFA's Q1, 2020 Market Summary Report; on page 3, you’ll find lots of big red arrows! So far in Q2, we’re seeing green arrows across many major market sectors, we’ll know by the end of June if we can solidify those arrows for Q2, but we’ll be prepared and we’ll let markets do their thing – which is allow us to take on risk and uncertainty in return for wealth building and inflation beating.

“Markets are designed to handle uncertainty.” - taken from page 18

We are in very uncertain times right now – times we haven’t seen since 2008 / 09. Markets handle new information in real-time as that information becomes available. Throughout the second half of Q2, markets have digested new information resulting in a negative response sending market prices lower because investors are reassessing expectations of the future.

And this is OK…this is normal!

Short-term market expectations can be positive (markets move up) and negative (markets move down), but long-term expectations have only one position (positive) and one direction (up)! If our retirement portfolios call for owning stocks this means multiple things: we are looking to build wealth and invest in instruments that historically beat inflation’s purchasing power eroding abilities*; and we understand short-term stock movements are wild and unpredictable, but long-term stock movements are far less wild and far more predictable.

*that’s a cumbersome statement. Explained better: inflation erodes our purchasing power. Per the definition, over time what a dollar can buy today will buy less of tomorrow. Historically, inflation is about 3% per year; if we have $100 today, one year from now we’ll still have $100, but its purchasing power would be about $97. This is bad! Cash is comfortable, but it just sitting around and losing 3% of its purchasing power every year is very bad, so we need to counteract that. And we do that by investing our extra – extra because we first want to have a properly-funded emergency account – into stocks and bonds. Stocks give us the best inflation beating returns, but they come with the most volatility, while bonds come with less volatility but the trade-off being their less, if any, inflation beating returns.

THE COST OF TRYING TO TIME THE MARKET

Last week I posted the importance of understanding that markets move quickly. What could happen to your portfolio if you miss just a handful of the days when the market moves sharply up? The answer is a significant reduction in your portfolio’s value. And nobody knows when those sharp up (and down) days are going to happen, so the only way we can participate in those days is to be invested every single day. In doing that, we’ll take the bad with the good – fortunately there’s a lot less bad than good – but the key thing is that we’ll ensure we participate in every up day because if we miss just one or a handful of the best up days the ramifications are drastic. The graphic below shows the hypothetical growth of $1,000 invested in US stocks in 1970 and what would be the outcome if you stayed invested every single day, if you missed just the one best day (out of >12,500 days), and so on…

the value a financial advisor provides

03/24/2020 MARKET UPDATE

I’m not the first person to note “markets move quickly,” but it’s a sentiment I share often as a reminder that they do…move….really…quickly. So we need to understand what that means and be prepared for when it happens. We’ve seen the stock market wipe out years of gains in about 5 weeks’ time, but today, we saw nearly a 10% move to the upside from yesterday’s closing price. Let’s put today’s move into perspective: on 3/23/2020 the S&P 500 bottomed at 2,193, today it closed at 2,446; 2,193 was a price we saw around Thanksgiving, 2016; the S&P 500 didn’t close above 2,446 until the beginning of July, 2017 – over six months later!

The S&P 500, today alone returned what six plus months did in 2016 – 17. This is why we don’t market time, and this is why we don’t move to cash. Frankly, we just know we’re not gonna get those moves right, we’re not gonna get out February 21st and get back in yesterday. Had we missed today, that’s an 11.5% return we might not ever get another chance at. Instead, we grit our teeth and stay in, and when the market takes a big dive, we put some money to work, and when it takes a big dive again, we put so more money to work. Maybe we rebound from here and we saw the low of this move, or maybe we make new lows later this week. We just don’t know, and nobody else does. But, in time, the market will rebound, and we’ll be rewarded for it if we stay vigilant and fight through these tough times. Markets move quickly, so we must move quickly with them to the downside in order to move quickly with them to the upside.

FROM A MARKET PERSPECTIVE, WHAT IS COVID-19?

I can’t speak about COVID-19 from a health and safety standpoint, but I can offer up this understanding of it from a market perspective. We are experiencing a “systematic risk” right now. Risks in the stock market can be split into systematic and unsystematic risks. In short, systematic risks are out of anyone’s control, while unsystematic risks are controllable.

A guiding investment approach is to control what we can control – those unsystematic risks: cost, portfolio exposure and allocation, time in the market, and staying the course as a disciplined investor during good and bad times. We cannot control systematic risks; systematic risks are unpredictable and nearly impossible to completely avoid, too. Common examples of systematic risks are interest rates, taxes, inflation, and the overall health of the economy. A more acute example of this is COVID-19. It remains to be seen if our response to COVID-19 is appropriately proactive or an overreaction. Regardless of the correct response, we have and will see an impact at the global economic level, and we have and will see an impact at our personal portfolio level, too.

As we come out of this and we look back, we’ll see the global economy will have slowed, just like our portfolios, but similarly – at some point – the global economy will rebound, and our portfolios will rebound, too. We will continue to control and mitigate unsystematic risks; systematic risks will always be present, and they will always be impactful. How we respond is paramount (both in an overall sense, and at our portfolio level). We can’t panic, this might get worse before it gets better, and we must look for opportunities to inject money into stocks while markets are down, and things have slowed. The US market has fully recovered from every historical market panic, and this time will be no different. In time, our resolve will reward us.