Yesterday was quite a day on the downside, and today is shaping up to be somewhat unusual on the upside. It’s timely here to reiterate something that I have been reminding people in meetings and phone calls for at least the past year—there’s nothing special going on.
The markets were halted for 15 minutes in Canada and the US yesterday after massive drops: 7% in the US and Canada down almost 9%. By the end of the day, there had been no recovery, and Canada’s TSX index ended the day down 10%, and the American’s S&P500 stayed down more than 7%. Coronavirus and the Saudi-Russia oil fight were the culprits identified at the time (oil prices were cut by a third overnight). More than that, stretched valuations and overleveraged market participants likely exacerbated the reaction to already bad news. Panic sellers then piled on to drive prices further down.
Today, the markets opened up largely recovering yesterday’s losses and closed out the day with the TSX gaining 3% and the S&P500 gaining 5%. That certainly doesn’t mean the pain is entirely over (I tend to think it’s probably not), and the threat of a recession is greater today than it was a month ago, though still not our baseline assumption. It also doesn’t mean that this is the start of a massive pullback in markets and economies.
Our clients have heard this all from me before, and likely have a lot of this in mind already. Still, at a volatile time like this, I thought it was appropriate to remind everyone of a few things that have always been true and that will always be true so that they can put some perspective on the current conditions.
1. No one saw this coming. No one.
We are fortunate. With few exceptions our clients were underweight their long-term stock allocations coming into this mess. But it’s not because we’re smart; it’s because we are process-driven. Anyone claiming that they knew this was going to happen belongs to one of two groups: people who have been saying that a drop was coming for the last many years and have thus missed all of the substantial gains in the market to now, and those who are not telling the truth. The COVID-19 outbreak was utterly unpredictable, and the fire of an oil price war between OPEC and Russia wasn’t telegraphed by anything.
2. Market sell-offs happen, and are healthy for long-term investors.
The market is currently wiping off the people who are forced to sell, who are in investments for the wrong reason or wrong timeline (e.g., the investor whose RIF payment wasn’t accounted for), the investors who are over-leveraged and can’t “afford” to keep going, and those whose risk-appetites have changed. But for every single sale of an asset, be it a barrel of oil, an ounce of gold, a Bank of Canada bond, or a share of Microsoft, there is a buyer who has decided that they are buying at a good price. Nothing is created or destroyed, just moved around. There is no “right time” to buy a stock, or a bond, or an ounce of gold. There is only the time that is right for that individual investor, with those constraints, and that timeline.
3. It’s times like these that advisors prove their worth.
I don’t mean by “besting the markets” or by “having mettle in hard times.” I mean by having spent the time while the market was going straight up putting in place the tools for dealing with it when it’s not. In my career, I have seen several big market swings including the 2008 recession and what I’ve learned is that the best relationships I have with clients come from discussions that we had during bad markets. And it shows—we have received more referrals from current clients, lawyers, and accountants over the past few months than over the whole of the past year. When markets are rising steadily, month after month, it’s easy to get complacent in the advice you’re receiving. It’s when the tide goes out that good advisors prove the coverage that they’ve given their clients.
4. There is no good way to sell everything and wait for the bottom to get back in.
Being all-in or all-out are always terrible strategies. I like to say that investing should be like turning a dial, not flipping a switch. My father used to say that it was about leaning into- and leaning out of- investments. Here is a chart of the magnitude of the one-day moves (+ve or –ve) since 1990 on the TSX with the highest and lowest 25 days highlighted:
Notice how close the top- and bottom- 25 are to each other in each period of time. If you tried to time the market and miss the bottom 25 days, you would almost certainly miss the top 25 days as well. When the market turned around in March of 2009, there was nothing particularly special in the news. In fact, most of the news was still negative. There was no technical indicator that started finally flashing green. There was no siren. The market just…stopped going down and started going up.
5. Your life plan didn’t change because the market was down yesterday, and it didn’t change because the market was up today.
Or at least it shouldn’t have, because financial planning is a long-term exercise that takes into account your required cash flows, your time horizons, your singular risk situation, and your family. A financial plan should be robust enough to survive market turmoil, family emergency, and future uncertainty. It should also be flexible enough that it can take advantage of opportunities that might show up, be it a kid getting into Princeton, a business that comes for sale, a cottage build that opens up, or extra savings to put to work.
6. Remember that stocks and bonds are just indirect investments in companies.
A stock is nothing more than your 1/10,000,000th share of a company. As long as the company keeps making a profit over the long term, you’re still making money whether you can sell your little piece for more or less today than yesterday. A bond is nothing more than a loan to a company that will pay you interest and that will pay you back in full at some point in the future. There are complications around that core idea, sure, but at its most basic it’s just as simple as that. Buy good companies, and loan to ones that will pay you interest and pay you back at the end of the day. And everything else will follow.
7. Keep calm and carry on.
This is the golden rule. Whether the market has soared to a new high or is testing new lows, the only thing you can do is work with all of the information available, take into account your own context, and keep working through your plan.
As always, my team and I are available to answer any questions you might have, be it about markets in general, wealth management, or your individual situation. And if after reading this you still feel nervous and would like to discuss those concerns, I’m never more than a phone call or an email away. It’s my job.