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Managing Your Portfolio During the Coronavirus Market


Transcript:

Hey guys, Mike Frontera here back with another Retirement Theory video. I’m coming to you today from my home office. Like many people, I am working remotely in an effort to flatten the curve of Coronavirus.

I do go out minimally to get the daily office mail and get groceries for me and my wife and my grandmother. It’s been difficult for my grandmother who typically has a very active and vibrant social life. But we did just teach her to use FaceTime, which has been a great way to connect despite not being able to see each other in person.

I’d be remiss to not bring up the difficulty that many of us are having with isolation. And of course the health, social and economic impact on all of us has clearly been considerable. At the same time, we must not allow our emotions to dictate the decisions that we make.

 

Though it may not come as a complete surprise, it’s probably very unsettling to hear that March has so far been one of the worst months in the history of the stock market. As I have said before, this is a situation that brings with it a lot of short-term uncertainty. And that uncertainty is what wall street likes least. As this month ends you will soon be receiving your March statements. And almost without exception, this statement will show a lower value than your last one. And I want you to know that that is alright. We’re traversing through a tough spot, no doubt. But we will get through it ok. Meanwhile, I want to equip you with the information you need to deal with that statement as a disciplined and successful investor.

 

So the first thing you need to do anytime you look at a portfolio statement is to understand what that total value actually means. In times like this I hear all the time, “I lost $10,000” or “I lost this or that”. But boiling your portfolio down to that quarter end value takes a completely wrong approach on how that portfolio is designed to actually be used.  All it’s really telling you is that had you had everything in your portfolio sold on the last day of that quarter, this is about what it would be worth.

 

But why would anyone do that? Remember, for most of us, our portfolio is designed to help us achieve our long-term financial goals. And I’m going to harken back to one of my favorite analogies. That is, we need to think of our portfolio as a toolbox  with a diverse set of tools, who’s job it is to work together toward our long-term needs.

 

Within that toolbox is our stocks, or stock-based funds. They are an excellent tool for us. We use them to provide us the long-term growth and inflation protection that we need to fully fund our goals. But much like a hammer wouldn’t do a great job of cutting your bathroom tile, stocks do very poorly at providing a good store of short-term value. They just fluctuate too much. But that doesn’t mean that when the value of them is down that they no longer belong in your toolbox. In fact, selling them at a when their value is currently down, defeats their purpose entirely.

Now, that’s not to say I don’t understand the human desire to try to stay clear of danger. But when we fail to see our portfolio as this diverse array of tools and only look at it as that sell everything at once liquidation value – which is how it’s displayed on our statements, it’s very natural to want to stem the bleeding. So let’s think about it for a moment and what would be the end result if we did that.

Well, we basically go in one of two directions when we sell everything for the current liquidation value.

The first direction is that we never buy back into stocks again. In this case we have traded in all of the tools in our toolbox for the one tool that is the best store of short-term value, cash. Cash is a great tool for that job of providing steady value for your needs that come in the short-run. But you have more than short-term needs. And what cash does a very poor job at is provide growth in the long-term. All of the tools that you need to provide you that long-term growth have just been liquidated at a time when their short-term value was down.

The second direction we take when we sell out of our stock holdings is that we intend to buy them back at a time in the future. When we do that however, we’re actually adding risk to reaching our long-term goals.

The risk is that we are not adept at timing the market and end up in a worse position as a result. As of this video, the S&P 500 is down about 32% off its highs a little over a month ago. To have selling now and buying back later, for that to be beneficial to you, first of all we need the opportunity. In other words, we need to have the market would have to go lower than it is right now to even give us a shot. If it only starts going higher once you’ve sold, you’ve already lost.

And if it did go lower, the most of us would have the reaction “whew, I avoided all that pain, so selling was probably the right thing to do”. To be successful we would actually have to ignore that thought and instead say, I’m buying back in right now because the market went lower.

Now, I have heard the question, should I sell now and buy back in when things settle down? Well, the problem is that the market often starts its recovery far before things “settle down”. Remember, the stock market is a predictor of our economic future. That’s why it’s called a leading indicator.

Check this out. Here’s an article from the absolute bottom of the market back on March 9, 2009. In hindsight, this would have been about the perfect time to buy into stocks. According to Fidelity, the one-year return from this point for the S&P 500 was 68%.

 A couple of excerpts from the article: “…stocks aren't likely to make a bigger move up until later in the year. In the short term, investors will be keeping an eye on the fluctuations in the credit markets, and the weekly and monthly employment figures.” And this one. "We're seeing more of the same…With an absence of good news, the path of least resistance is down."

Now, do you read in there anything that would lead you to believe that things have settled down and it was a good time to buy back into stocks? Keep in mind that in the month leading to the bottom, the market was not only volatile, it was down 14 out of 19 trading days. The reality is that by the time you do read information that things are heading in the right direction, it’s likely too late and now you’re forced to buy back in at a higher price than what you had previously sold for.

Instead we need to understand that our portfolio is indeed a diverse set of tools that are designed to help us achieve long-term goals. We don’t liquidate everything in one shot, and so the month-to-month liquidation value that is printed on our statement is not what is most relevant. A review of your goals, and how and when they need to be funded is where you need to focus. 

Do you have enough cash and lower-risk bond assets to cover your short and intermediate term needs? If most of your goals don’t need to be met for a number of years down the road, does it instead make sense to increase the number of shares of your stock-based tools? We know right now that we can buy them at roughly a 30% discount versus what they cost a few weeks ago. When we start thinking like this, we take great steps forward to becoming the disciplined and successful investors we need to be in order to achieve our goals.   

So! Do you have questions for me? Let me know. Come visit me at www.retirementtheory.com or send me an email at mikefrontera@retirementtheory.com. Did you click subscribe on this video or follow me on Facebook? I think that you should. You’ll continue to see videos like these on everything retirement planning.

Once again, thank you for joining me, take care of yourselves, and we’ll see you next time!



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