A Second Chance

Whenever investors see large downturns in the stock market, it is easy for them to wonder “should I have seen this coming”? When investors start to look in the rear view mirror at all the COVID-19 news, it’s even more difficult to pick the date of “when should I have known”?

Here are some of the most common dates since this began:

Do you pick January 20th, when the first official case appeared in the US? The stock market didn’t think so, as the Dow Jones Industrial Average moved higher from January 20th through February 20th.

Do you pick February 28th, when there were 63 total cases in the US, and 0 deaths? 63 cases out of a population of 328 million would not be on the radar for most investors.

Do you pick March 6th, when there were now 319 total cases in the US, a fivefold increase in a week? Most elected leaders didn’t think so, as all schools were still open.

How about March 12th, when NY Governor Cuomo officially announced the “lockdown” of New Rochelle in Westchester county? At that time there were about 1,630 cases across the US, with 325 in New York State (but no reported cases in Steuben, Chemung, Tioga, Tompkins, or Onondaga counties).

Do you select March 16th, when the White House announced their “social distancing” directive of “15 days to slow the spread”? There were 4,596 cases in the US on that date.

How about on March 29th, when the White House announced an extension of the social distancing guidelines to 30 days (up from the previous recommendation of 15 days). US cases totaled 144,000 on that day.

Any one of these dates would have allowed a seller to be “out of the market” before the US cases ballooned exponentially higher to our current case level of 560,000 infections.

Cases are up 34,000% from the date New Rochelle was locked down. Cases are up more than ten-fold since “15 days to slow the spread” was announced. Cases are up almost four-fold just since March 29th. Surely any one of these dates would have been a better time to exit the stock market as compared to today. Right?

That’s not the case.

The Dow Jones Industrial Average is up approximately 12% from the date New Rochelle was locked down. The Dow is up over 17% from the date that the White House announced their plan of “15 days to slow the spread”.

If we look back more than 6 weeks ago to February 28th, the Dow is lower, but its lower by 6.65%. While any decline can be cause for concern, a decline of 6.65% is a lot less scary than where things bottomed out (so far) on March 23rd.

So what does this mean for investors?

A Second Chance Perhaps…

More than one investor has used the phrase “kicking myself” over the past few weeks, as in “I’m kicking myself that I didn’t sell everything when things started to look bad”.

We have seen an incredible rally from the stock market lows reached on March 23rd. For investors who have experienced heightened feelings of anxiety, stress, apprehension, and sleeplessness over the past several weeks, you might find that the current market levels provide a more opportune exit point as compared to three weeks ago.

We are not recommending large-scale sales by any clients, but we want to point out that for those clients who find themselves glued to CNBC all day long, and who believe that their personal risk tolerance is no longer aligned with what is going on in the world, current market levels provide an opportunity to reduce risk.

In one of our recent articles – Should we Temper our Expectations – I mentioned that it is not uncommon for the stock market to see huge moves to the upside after periods of violent selling, only to see the lows “retested” several days or weeks later. I think investors have to be prepared for that possibility. If you feel that you missed out on an opportunity to sell a few weeks or a month ago, current prices might give you the ability to re-think that decision.

Here is a chart of some of the more widely held growth investments owned in client portfolios, illustrating their YTD return through 4/23, and now their YTD return through 4/12, along with their 2019 return and their three and five-year average annualized returns:

	YTD Return through 3/23/20	YTD Return through 4/12/20	2019 Return	3 Year Average	5 Year Average
Glenmede Large-Cap Growth	-30.57%	-13.53%	+34.53%	+9.84%/yr	+8.35%/yr
Jensen Quality Growth	-28.59%	-11.03%	+29.02%	+10.95%/yr	+9.99%/yr
Schwab US Large-Cap Gr.	-25.52%	-8.31%	+36.01%	+13.24%/yr	+10.41%/yr
Brown Small Company Gr.	-23.55%	-11.84%	+29.22%	+10.74%/yr	+10.40%/yr

When we look at the Glenmede Large-Cap Growth Fund, we see that it was down over 30% three weeks ago on 3/23. As of this morning, it was down 13.53%. A loss of 13.53% is significant, but it is less than half as bad as things were just three weeks ago. Considering that the Glenmede fund generated a positive return of +34.84% in 2019, selling at current levels still produces a significant return over the past 15 months (Jan 2019 through April 2020).

The Brown Small Company Growth Fund was down close to 24% three weeks ago, and now it is down less than 12%. After accounting for the +29.22% return in the Brown Fund in 2019, selling at current levels would also generate a significant 15-month return.

All of these examples have recovered more than half of their YTD decline when we look at where they bottomed out on March 23rd.

Regardless of the YTD decline, all these funds have generated significant returns over the past three and five-year periods.

What should I do?

The decision to be a seller in any market downturn is a highly personalized decision. One size does not fit all.

If you have found yourself getting overly stressed about the effects the virus is having on the stock market, and your personal portfolio, then reducing stock exposure at these levels could be quite prudent. While I believe we will see the stock market recover over time, it is doubtful that the recovery will be in a straight line up. We will most likely see continued days of great volatility in the weeks and months ahead. This volatility might be especially heightened in the next three weeks as most companies in the S&P 500 report their first quarter earnings.

I would never recommend that someone sacrifice their short-term mental and emotional well-being for long-term stock market returns. If you think you will sleep better at night with less stock exposure, then now is a good time to consider that.

For clients who have not been checking their account balances online every day, and who are not tuned into CNBC every day at lunch, then I would remind them that if they previously told us they were planning on purchasing new homes or new cars, sending their children to college, or retiring in the coming months, we’ve already set aside the money needed for those endeavors in the more conservative-to-moderate parts of your portfolios.

For clients who rely on their portfolios for month-to-month income, we tend to keep anywhere from 5 to 15 years worth of monthly withdrawals in the more conservative-to-moderate parts of your portfolio, more than enough to provide for any month-to-month needs without needing to sell stocks in this volatile environment.

Even if stock sales are not “needed”, they can still be appropriate for our mental well-being.

I would suggest that all investors spend the next few days taking an inventory of your emotional state over the past few weeks to determine if changes should be made. Have you been staying up late watching financial news? Have you been looking at the stock market on your smart phone multiple times per day?

I would also solicit the input of your spouse and/or close friends. You might not think you are obsessing over what is happening in the stock market, but your spouse or friends might remind you that the stock market is one of your top three nightly topics of conversation at dinner. If that is the case, let us know and we can help to reduce your stock exposure to a level that might improve the associated stress and anxiety, without necessarily harming your long-term financial future.

About the author

William B. Burns, Jr. CFP® is a CERTIFIED FINANCIAL PLANNER professional and President of Burns Matteson Capital Management, a Financial Planning and Investment Advisory Firm with clients in 21 states throughout the US. He helps high-net-worth families reduce the worry and anxiety sometimes associated with wealth, allowing families to reclaim that time to reinvest back into their family, social, and professional relationships. www.BurnsMatteson.com