In recent past, I wrote about how the market was rebounding, but also how I thought no one should be getting too excited about it. I thought there’d be a lot of negative volatility after everything settled down and we started to assess the damage. I also wrote how that volatility would be temporary, in terms of the investment universe, and eventually, we would begin to regain ground in a slow but steady fashion.
It looks like it’s all coming true, but not quite the way I envisioned it.
Yes, we regained quite a bit of the losses we suffered earlier, or even all of the losses we’ve suffered. Depending upon your portfolio, you might even be experiencing a nice return on investment over the last year.
And yes, we are, and we will experience that volatility I mentioned.
What I didn’t, and couldn’t have foreseen, is our current state of national health where COVID-19 is making such a comeback that communities are now earnestly discussing shutting down again to various extents.
We were supposed to be in the phase of assessing our losses, licking our wounds, and preparing to pick ourselves off the ground over the next eight months or so. What we were not supposed to be doing right now is preparing for the possibility of shutting down again and suffering more losses.
This is not a comment at all about whether shutting down is right or wrong. This is a comment that the second wave is happening as we speak, and it’s happening just as we’re all assessing the damage from the first wave.
What does all this mean?
It means we’re in for some volatility. The market absolutely hates uncertainty, and right now, there’s a lot of uncertainty. Even though I create wonderful, risk mitigated portfolios, and I communicate with my clients on a consistent basis, I can hear concern in their questions and our conversations. And they not only may be more insulated than others, but they have a professional to bounce their concerns off of. If you’re on your own, it’s understandable you might even have more trepidation. This uncertainty is, in no small part, helping to cause the current volatility. There’s economics involved obviously also, but a lot of it is the uncertainty of what our short term future holds for us.
The coming Presidential election is also playing a part. And I do think there will be some volatility in the markets depending upon who gets elected. But I do not think it’ll be long lived, and I do not think the result of the election will make a difference over the next several years. Governmental policies make a difference over a long period of time. It’s shorter term economics and public psychology that will affect you over the next few years.
Between the COVID-19 resurgence, and the election, there’s a lot of nasty economic news flying around, and a lot of uncertainty. So there’s going to be a lot of volatility.
There’s always a weight upon my shoulders I’ll forever feel because I’m responsible for people’s life savings. Even though I love the portfolios I’ve create, I’ll always feel that weight, and in some ways, I don’t think I’d want it to ever completely disappear.
But aside from that foundation of concern for my clients, I have zero discomfort in keeping my them invested during this time. Obviously, everyone is an individual, and in that way, some have customized needs, such as a higher ratio of liquidity in their accounts. But if a portfolio is built around the needs of an individual or couple, not just financially, but also including their physical, mental, and emotional state, that portfolio should behave in a way that the client will be comfortable with in times of volatility.
A spike in COVID-19 cases that won’t be going away anytime soon means more economic woes in the short term.
A presidential election means more uncertainty short term.
The markets don’t like economic woes or uncertainty. So there’s going to be some negative volatility coming up short and near term.
This is all going to smooth out. The essence of a bounce back, and the corresponding relief people feel from that bounce back and from whatever vaccine may be either out there or close to being out there, will be the psychological engine that will rumble. I think by mid 2021, if not before, we’re going to see the markets start to find a little upward consistency.
Build your portfolio to what you’re comfortable with during a worst case temporary scenario. “Worst case temporary” is the key part. It’s easy to put together a portfolio you’re happy with when the going is good. Build your portfolio you’re comfortable with, for what you envision to be a worst case scenario. And make sure you keep in mind that any worst case scenario will be temporary. Obviously, if you used “Permanent” as one of your foundational criteria, you’d probably go all cash and bonds. But going by the thought that the worst case would be temporary, psychologically gives you permission to stay invested, yet in a way you’re comfortable with during a worst case scenario.
If you have any questions, I am always up for a conversation.
By the way... The photo attached to this article is a graph of the S&P500. Can you guess, approximately, from when to when? The first 5 people to give me a good approximation (within 6 months at each end), if you're willing to come to the office to pick it up, I'll give you a book of thoughts, quotes, and investing concepts by Philip L. Carret, one of the great investors of our time, and the founder of the Pioneer Fund, one of the first mutual funds in existence. Hint: It has something to do with something I've written in this article.