As we enter the second week of the Coronavirus outbreak, we wanted to share some additional thoughts around what we are seeing, how this is impacting the investment markets, and how Greenspring is responding.
What more do we know?
Unfortunately, not much. We stated before that the two most important factors in determining the severity of this virus is its reproduction number (how fast it spreads) and fatality rate (what percentage of people who are infected die). One of the largest factors in knowing these numbers is testing. If you only test the extremely sick, your numbers will look much worse. For example, in the US 11 people have died from 159 known cases, a fatality rate of 7%. In South Korea, 35 people have died out of 6,088 cases, a fatality rate of 0.5%. The difference? South Korea is testing thousands of people a day, while the US has tested fewer than 500.
How is this impacting the investment markets?
The old saying that the market hates uncertainty couldn’t be more accurate. Speculation and rumors are running wild and until more certainty about what we can expect becomes available, we most likely will experience continued volatility. While the stock market plunged over the past 2 weeks, there have been short spurts of tremendous returns. We have seen two days in the past week with the Dow Jones Industrial Average gaining more than 1,000 points. It is volatility like this that makes it extremely difficult to time the markets.
As we noted in our previous memo, diversification has helped. We’ve been reviewing different asset classes since the volatility started and we have found the following returns from February 20, 2020 through March 5, 2020:
US Stocks -10%
International Developed Stocks -9%
Emerging Market Stocks -6%
Real Estate -6%
US Bonds +2%
What is Greenspring doing?
As we have said many times, the best time to plan for a crisis is BEFORE it happens. That is why every client’s portfolio is tailored to their unique needs. At a very high level, we think of client situations in one of three buckets:
• Client is actively adding money to their portfolio– as long as you believe that markets will eventually recover (which we do), this segment of our clients are able to buy investments at much lower prices than they were able to a few weeks ago. It may not be pleasant to see portfolio values lower than they were at the beginning of the year, but volatility can be your friend if you remain patient and disciplined.
• Client is not adding money, but also not taking money out– while this isn’t the same kind of opportunity that it is for “the savers” – it is a reminder of the importance of constructing your portfolio with an appropriate amount of low volatility assets such as core bonds; this allows you to have the remainder of your portfolio in more risky assets such as equities and diversifiers. While volatility is not your friend, patience and discipline in following your investment plan and taking advantage of rebalancing opportunities are the appropriate ways to handle downturns.
• Client is taking money out of their portfolio on a regular basis– this certainly can feel very scary. When we develop a financial plan for our clients, we account for volatility like we are now seeing now by having a healthy segment of the portfolio in safe assets like bonds. As unpleasant as this may be, this will not be the last bout of volatility we will see in our lifetimes. Having multiple years of distributions in safe investments allows us the flexibility to not have to sell stock investments at depressed prices. Historically, while it can take multiple years, the market has always recovered and gone on to set new highs.
With all of that being said, Greenspring’s investment team is currently focusing on two items: using this opportunity to tax-loss harvest when appropriate (capturing investments losses to offset income and future gains) and rebalancing portfolios (buying depressed assets when they dip below our target portfolio thresholds).
One final consideration that we mentioned in our last memo: If you have a mortgage, it is very likely a great time to consider refinancing. Because mortgage rates are at all-time lows, it is almost inevitable that you can obtain more favorable financing rates. While no one likes the volatility we are seeing, you should take advantage of the gift of lower interest rates. A quick search of mortgage rates as of March 5th is showing the following:
30 Year Fixed: 3.25%
15 Year Fixed: 2.875%
Please contact us if you would like us to run a breakeven analysis or determine the value of refinancing.
Volatility like we are seeing can be unnerving. One thing to keep in mind is that these losses are not entirely out of the ordinary. Since 1980 the average intra-year drop in the S&P 500 is about 14% each year. As unsettling as this period may be, these losses are part of what we have to put up with to earn returns that the stock market has rewarded to those who are disciplined.
Our job is to help you navigate through this period of volatility. Don’t hesitate to contact us with any questions you may have.
Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.