As we all know from news headlines, global stock markets have now entered a “bear” market, having declined more than 20% from recent highs. As of Thursday, March 12, U.S. stocks had declined over 26% from their high point on February 19. And markets have remained extremely volatile since then. In our recent market update, “Separating Emotion from Action,” we referenced a famous quote from value investor Warren Buffett: “Be greedy when others are fearful.” Historically, this has been a very good investment mantra to have.
In Litman Gregory’s 30-plus years, we’ve been through several crises and stock market declines. From experience, we know the best time to stick to your investment discipline and buy is usually when you feel fearful but your analysis suggests the likelihood of a strongly favorable medium- to longer-term outcome is very good, as we believe is true today.
A 25% or greater drawdown in U.S. stocks is quite infrequent. It’s happened only eight times in the past 70 years. But such painful periods do happen. And as we’ve often said, investors in equities need to be emotionally and financially prepared for them. And the longer-term returns are worth the short-term discomfort. Since 1950, buying U.S. stocks after the initial 25% decline of a bear market—as we are doing in a prudent, incremental fashion for clients in this downturn—delivered strong returns over the next five or 10 years most of the time.
Given that the main catalyst for this downturn is the coronavirus (alongside an unexpected oil price war) and that there is an end game for the virus at some point, it seems reasonable that markets will rally when virus news turns incrementally positive (the spread slows, new cases stabilize or drop, treatments or vaccines are developed, etc.). But even if this bear market lasts longer than the historical average of 18 months, potential forward-looking U.S. stock returns have already improved. And they will get even better the lower stocks go. Because we entered this crisis underweight to U.S. stocks, we have the flexibility now to add back to and even overweight them if the selloff deepens. Even after our first incremental purchases, we are still underweight to U.S. stocks.
So while it may be hard to imagine now, there will be an end point to this crisis from a medical perspective and thus from an economic and financial markets perspective. Of that, we think we can be confident. The key to overcoming panic in financial markets is to focus on the future. Remember, severe losses only become permanent losses if you sell, go to cash, and lock them in. Volatility is uncomfortable when you’re living through it, but it sows the seed of the future’s strong returns.
With all this said, we recognize that it is natural to be concerned when volatile markets impact your portfolio holdings. For that reason, we encourage you to connect with your Litman Gregory Advisor to discuss any questions you have about your situation and portfolio. We are here for you and appreciate the trust you place in us to be your guide through the everchanging financial market environment.
Our Perspective and Strategy During Turbulent Times
It’s been a difficult year, to say the least. As September comes to a close, we’ve weathered a disappointing month in the financial markets after a relatively benign August and a strong July. As is the case in any bear market, investors are braced for more to come. In this post we provide a summary on the forces that brought us here, how we’re responding, and what to expect going forward.
With Inflation Rising, Why Have Inflation-Protected Bonds Declined?
As the outlook for inflation turned less “transitory,” treasury inflation-protected securities became interesting to many investors. But these bonds have shown they aren’t immune to broader bond market declines, leaving investors to wonder, “How can my inflation-protected bonds be down when inflation is on the rise?” In this post we explain how these bonds are impacted by different market variables, including inflation, and why we believe they still deserve a place in our client portfolios.
I Savings Bonds Currently Offer a Generous Yield
With current yields over 9%, Series I Savings Bonds seem to offer a "free lunch". These bonds are issued by the U.S. Government and pay interest linked to current inflation rates, making them an attractive option for most savers and investors.