If anyone tells you that they aren’t confused right now, they are either intellectually dishonest or just plain lying. The events of the last six months have most of the rest of us scratching our heads and reflecting on the uniqueness of this time in history. After a significant drop in investments of all types, we’ve now witnessed one of the strongest and fastest rebounds in history. Actions taken by the Fed, along with sizable fiscal stimulus, helped turn the markets from a bear to a bull in just a short few months.
Uncertainties, Too Many to Count
The pandemic continues to affect most countries around the globe. On top of the human tragedies created by the infection, we’re confronted with the economic situation caused by the necessary actions taken to contain it. The social distancing prescriptions the doctors ordered have caused significant economic hardship on a host of levels. Many companies edged closer to the brink of bankruptcy even as we watched others fall right over. Most levels of government are in difficult situations with the resulting falloff in revenues. Families around the world are wondering just how they will manage to pull through with their jobs, either temporarily or permanently changed or eliminated.
As if that weren’t enough, we find ourselves amid a social movement, set off by the tragic death of George Floyd. Add to it, a continuing trade war with China, the much-debated tariff regimen, producing a tax on consumers of foreign goods, and the growing contentiousness and partisan discussions around the November presidential election.
Are you feeling confused or a bit uneasy? You are in good company.
Of course, the future, and mainly as it affects politics and the economy, are always less than certain. Most of the time, folks feel they have a sense of just where things are heading, and most of the time, they’re pretty close to making an accurate assessment. With all the uncertainties swirling around us at this time, however, most will admit they do not have strong convictions as to the shorter-term outlook. Which, of course, is why we always stress keeping your investment focus on the longer-term.
When we lengthen out our time horizon a bit, the ramifications of all this uncertainty become just a bit easier to bear. Look three, four, or even five years into the future, and we can begin to have a better sense of what the future will likely hold. The notion of a vaccine for the virus seems all but certain, though the timing is less so. A substantial economic rebound looks very likely, and the idea that nations will negotiate to facilitate their economic success is easier to believe.
Keeping an Eye on the Long Term
The implications for our investment portfolios and the financial planning goals that rely on them are certainly more palatable when we think over the longer-term. The daily headlines pack a bit less punch, and it’s easier to see our future with a bit more clarity.
We all know by now that investments in stocks are longer-term affairs. Stocks prices go up and down fairly frequently and, as such, don’t provide a good funding source for day to day necessities. This is why we recommend you maintain emergency reserves and enough liquidity in short-term investments to cover your short-term cash flow needs.
Over time equity investments are an important part of our portfolio, helping with their higher growth rates to hedge against inflation and to participate in the benefits of a growing economy. Economies do grow over time, supported by inflation as well as population growth, higher levels of efficiency, better technologies, etc.
Taking a longer-term view helps us be better investors in a whole host of ways. Rather than sell in fear at an inopportune time, we look ahead and hold those securities for superior growth potential. That single steadfast action catapults us to the head of the pack in terms of longer-term performance. Drilling down a bit further, we’re also not beset by the problems of valuation in quite the same way that we hear our friends or co-workers discuss. “Is the market too high” becomes a subject only considered at the extreme and, even then, looking out five years brings a very different perspective.
Financial planning helps us take that so-important, longer-term view as we contemplate future cash flows. It also helps to quantify what our portfolio needs to deliver and when.
Your Portfolio and Our Management
Current valuations and expectations for future growth or lack thereof can undoubtedly aid us in the decisions we make in our asset management process. We use relative valuations regularly to help us make decisions about the asset classes in your portfolio. This analysis works to identify areas that are over or underpriced, which allows us to take advantage of current conditions by over and under-weighting within a portfolio mix.
Right now, we are in a nearly “neutral” position across most of the asset classes in your portfolio for the first time in many years. Across the asset classes, it is only in our US Large Cap stocks that we are maintaining a slight over-weighting at the expense of US Small and Mid-Cap stocks. That has been an excellent place to be through this latest turmoil as shares of small companies especially were affected to a higher degree by the recent turmoil. We’re currently assessing that weighting as that the harder hit in smaller company shares have brought their relative valuations more in line with historical norms as larger company stocks.
As to current market valuations as a whole, there is an awful lot of disagreement among investors. Some would argue that the recovery will be slower than anticipated and that the rise in share prices over the last few months is overdone. Others point to the components of stock valuation math and note that the very low-interest-rate environment coupled with a longer-term outlook (as earnings growth returns toward normal a few years hence) justifies the current level of the market. Both make valid points, and only time will tell if the current market valuation is a bit rich or just about right. Measured over a slightly more extended period, neither will likely affect your financial well-being five years from now.
Your statements certainly look better now than they did at the end of the last quarter. Volatility, even the extreme sort we witnessed this year so far, is part and parcel of investing. Assuming your portfolio design is consistent with your needs and goals, this volatility won’t have a detrimental impact on your long-term plan.
As always, we welcome your questions, comments, and concerns.
“The stock market is a device to transfer money from the impatient to the patient.” – Warren Buffet
- As Marion County cautiously adjusts to phase two, our team is back to the office in rotation. That means if you need to stop by our office during normal business hours, someone will be there to greet you.
- If you stop by, you might see a new face. We’re happy to welcome Eric Tanikawa to our client services team. He and Sarah are working closely together as he gets up to speed with all things paperwork.
In compliance with new SEC guidelines, The H Group, Inc. has released the ADV Part III. The goal of the SEC in this requirement is to help clients better understand the types of relationships, costs, and potential conflicts of interests associated with their financial professionals. Like with most regulatory documents, this document can be dense, and – because it is a blanket for all Registered Investment Advisors under The H Group, Inc., – it doesn’t fully reflect the relationship our office here in Salem has with our client families. We encourage you to reach out to us with any questions to help clarify.