John Maxwell, in his book The 21 Irrefutable Laws of Leadership, opens his chapter on the Law of Navigation by discussing the importance of controlling your direction rather than being controlled by it. Maxwell said, “Anyone can steer the ship, but it takes a Leader to chart the course.”
The Dow Jones Industrial Average crossed into bear market territory on March 11—defined as a decline of at least 20% from its recent peak. Many airline companies and energy stocks surpassed this threshold with even steeper drops, as equity prices were impacted by accelerating uncertainty about COVID-19 and the outbreak of an oil-price war between Saudi Arabia and Russia.
At Stonebridge, we do not see these events as a reason to change our goals-based portfolio allocations. In our view, while volatility may be significant, neither the virus nor declining oil prices represents typical catalysts for a recession. On the contrary, lower oil prices also have the silver-lining effect of reducing energy expenses for business and consumers; and as the virus’ impact on markets fades, so too should its bearing on the U.S. economy.
It is important to remember that declines of this nature, while unsettling, are to be expected. We take the possibility of market downturns into account when constructing our goals-based portfolios – meaning that unrealized losses resulting from market downturns are factoring into our capital market (return) assumptions.
Navigating a sea change - Equity bears bring out bond bulls
Stocks generally do not make gradual moves during bear markets. Instead, they tend to spike higher and lower from day to day. Nowhere are those spikes more dramatic than when the market hits a bottom. Over the last 50 years, the Dow Jones Industrial Average has experienced seven major bear market cycles—price declines of 20% or greater. On average, these bear market cycles lasted about 20 months.
The U.S. Federal Reserve recently made its largest emergency cut to short-term interest rates since the financial crisis of 2008 to 2009. The recent move was an attempt to curb the potential economic fallout from the COVID-19. The yield on the 10-year U.S. Treasury is at an all-time low. After closing 2019 at 1.92%, the yield on the 10-year US Treasury plunged below 0.50% on March 9, according to the U.S. Treasury Department (yields and prices move inversely).
Although low yields are unattractive from an income generation perspective, bonds do not merely serve as a source of income in a portfolio; they also help offset stock market volatility and protect career earnings.
Remaining unshakeable in a world of volatility
When you are truly unshakeable, you have unwavering confidence even in the midst of the storm. When others are fearful, you have the presence of mind and knowledge to take advantage of the turmoil swirling all around you. This state of mind allows you to be a leader and “chart the course,” not a follower. This is the power of goals-based wealth management. You remain in control and not the market.
The key to fearless investing and unwavering confidence is the understanding that markets move in cycles. Corrections occur with surprising regularity. It is knowing that every single bear market in the U.S. history has been followed by a bull market, without exception.
In our view, the greatest danger is not a correction or bear market. It is being out of the market. A study by JPMorgan found that 6 of the 10 best days in the market over the last 20 years occurred within 2-weeks of the 10 worst days. Here is the big idea: if you became fearful and sold at the wrong time, you missed the extraordinary days that followed, which is when patient investors made almost all of their profits. In other words, market volatility is not something to fear. It is an opportunity for you to achieve your greatest financial potential when your portfolios are aligned to support your career, life and wealth goals.
Avoid the merchants of doom
Warren Buffet said, “The only value of stock forecasters is to make fortune tellers look good.” When it comes to investment discipline, it is best to face facts. And the fact is, nobody can consistently predict whether markets will rise or fall. It is a fool’s errand to believe that you or I could successfully “time the market” by selling and buying at precisely the right moments. Even a man with a broken watch can tell you the correct time twice a day.
Recognizing these long-term historical patterns empowers you to utilize them. Knowledge brings understanding, and understanding resolve. Goals-based wealth management equips you to “stay the course.” Remember, bear markets don’t last.
“The best opportunities come in times of maximum pessimism.”
Sir John Templeton
To learn more about our distinctive goals-based approach to life and wealth management, please do not hesitate to contact our team directly.
We look forward to continuing to provide useful insights and relevant solutions focused on helping you achieve your greatest financial potential.
Thank you for your continued trust and confidence in Stonebridge.
All the best,