June 2020 – Questions and Answers
Q: Mr. Johanson, 2020 has been an extremely rough time for the world and certainly for investors. Both U.S. and international equities were down more than 35% from the high reached on February 19, 2020. What is going on? It has come back up some, but what should investors do?
A: Breathe and remain patient. Volatility is going to be with us during this uncertainty. Hope should return as markets bounce back. Markets have climbed through a wall of worry several times.
Q: Are you saying stocks have bottomed and a V-shaped recovery is in the cards?
A: No. Stocks have had a nice run since April and may come down a little from here. It is important to remain calm and have perspective. There’s a possibility the markets could fall 10% or 20% again. For that reason, when we built your personal portfolio, we took a look at your time horizon and income needs. We always try and maintain enough in cash and bonds, so you need not panic sell at the worst possible time.
Q: In April and May while tens of millions of Americans were losing their jobs, the stock market rose. What is behind this disconnect?
A: Although it is not intuitive, there is a weak relationship between equity returns and economic growth. The two do not work in tandem. The markets are forward-looking. They try to value and reflect the forecasts for next year and the year after. The liquidity the Fed has infused into the economy has shored up confidence, so we are hopeful that the economy bounces back.
Q: What should we do now?
A: Individual shareholders fall into two classes; Speculators and Investors. Speculators are day-trading stocks looking for a quick uptick for a minute, hour, or moment in time. To be a Speculator right now is scary. I would be very worried if I were a Speculator as the Geo-political and earnings news of today will whipsaw you. I don't give Speculators advice.
Our clients are Investors. Investors buy companies looking into their future potential. At times of economic worry, such as today, you should sleep a little easier having a diversified portfolio of quality blue chip, dividend paying companies that are going to weather the storm. We urge clients to invest and consider the long-term benefits of the economy growing.
Q: So, an Investor needs to stay the course?
A: Even if I was pretty confident that the decline was imminent — and it is possible this summer — you've not only got to get out, you've also got to get in at the right time again. Your predictions must be right twice. If you get out now, and the market goes down 15-20%, many investors will be so scared they won't get back in. My investment strategy is to generally stay-the-course. I have tended to be comfortable when these economic shake-ups happen. I don't much like them, but I do like buying on the dips for the long term. Love it.
Q: Why shouldn't I take my money out of all of these stock and bond indexes and just put it in cash or a CD?
A: This choice may be right for the short-term, but I suggest you consider what you are going to do next. A good bit of this decline has most likely already occurred. If you could get out and get into CDs when the market was 30% higher than it is now, that would have been a very nice thing to have done. People are always bullish at the highs and bearish on the way down. So, you're buying at the highs and selling at the lows.
I would advise against ever doing 100% of anything. It's never a good idea to time the market. In the long run, investing is not about markets at all. Investing is about enjoying the returns earned by businesses. The stock market is nothing but a giant distraction in that quest to acquire returns that businesses earn. It over-magnifies everything. Investors get scared. Their advisors get scared. And the result is exactly what we're experiencing now — a bit of a mess.
Q: People are saying we could see a repeat of what happened to the stock market in 1987 or worse. Do you think that's the case?
A: 1987 was nothing! In a short period — one day — it was pretty much all over. The market went down a bit less than 25% but by the end of the year, it was up 3%. I’ll repeat, 1987 was an up year in the market. I cannot predict if 2020 will be the same, but if people are saying that it could be like 1987, they should pray that it is!
Q: Can you leave us all with some final words?
A: Sure. In my over 30 years in the industry, I have seen 20% declines ten times. I have also worked through four recessions. They are no fun. The biggest take away from all of the events, the market came back and flew to new highs. I have no reason to doubt this could take place again.
Most of our clients have been with us for many years. We have been through a few bears markets. Try not to live or die by the daily headline news or current stock prices. The media knows bad news sells. To take a line from Shakespeare, a day of movements in the market is like "a tale told by an idiot — full of sound and fury, signifying nothing.” My best advice is not to get side-swiped by the daily news – think long term and have faith in your individualized portfolio.