Throughout the past week, with Coronavirus fears and uncertainty at the forefront of traders’ minds, stocks fell at a record pace and quickly reached the “down 10% from peak” measure of a “correction.” I don’t want to say I told you so, but…I told you so.

We’ve become so accustomed to a strong upward surge in the stock market in the last few years that even though we know stock market pull-backs are a normal part of investing, we still feel shocked when one happens.

Even with our knowledge of inevitable downturns, investors’ reactions to such downturns remain fairly common: beating themselves up for not selling ahead of the fall, wondering if the worst is yet to come, and agonizing over what they should do now.

We don’t know how much worse the market will become before it improves. There are many positives on the economic and investment front, but the Coronavirus does seem to be the type of event that can cause not only investor panic, but also a real drag on the economy.

With this uncertainty of not knowing how much farther, if any, the markets will drop—and how long it will take them to recover—I was reminded of another time when markets and the economy were much worse, and we faced even greater uncertainty: the 2008 Global Financial Crisis.

I wrote the letter below to clients in the Fall of 2008, during the lowest points of the 2008 crisis. I applied an acronym (S.T.O.P.) I learned as a wilderness guide and survival instructor for dealing with the feelings of loss and panic in the wilderness emergencies to the markets. Markets and the economy went on to experience phenomenal growth after 2008, and investors who took a moment to S.T.O.P. and avoid panic and despair were greatly rewarded—just like investors who stayed invested with quality diversified portfolios through major market downfalls and recoveries prior to 2008. I am confident this approach will be proven effective once again with our current market rout.

Markets Persevere Through Financial Uncertainty

October 29, 2008

Dear Client,

Over the course of the past year we’ve spent considerable time discussing the credit situation and planning for a market downturn. In September and early October, a series of failures and government takeovers at various financial institutions precipitated dramatic market plunges and talk of an oncoming global recession. The level of volatility and the speed of these drops surprised everyone. These are scary times to be an investor, to say the least. The number one question I’ve been hearing is, “What should we do?” In wilderness survival schools, a simple but useful acronym is taught for dealing with emergency situations: S.T.O.P. (Stop, Think, Observe, and Plan). I think using “S.T.O.P.” as an action plan can be helpful during these periods of uncertainty.

Regarding the first point, “Stop,” John Bogle, the founder of Vanguard funds, recently said of the bear market; “Don’t just do something, stand there.” With properly diversified holdings and having any portfolio spending needs within the next few years covered by high quality, short-term fixed income type holdings, you are going to be well served by maintaining your current allocation and waiting for the eventual stock recovery. For clients drawing income off their portfolios, your bonds are the bridge that will carry you from one market peak to another and allow you to hold your stock position for long-term growth. The markets will come back, it’s a matter of time.

“Think” and “Observe” may work better if you first observe and then think, depending on the situation. The point, of course, is to make an attempt at both, using rationale to counterbalance emotions and impulses. As simple and unconscious as thinking and observing may sound, we know that watching Wall Street’s dizzying ups and downs can increase the heart rate and cause pupils to dilate. It can become hard to concentrate, leave one feeling confused and guilty, or stunned and despondent. People often feel the need to “do something.” They wonder why they didn’t “see this coming,” and are susceptible to panic reactions. Some “thinking” questions that are useful during market drops:

Is our financial plan based on earning positive returns every year? No.

Have we accounted for bear markets in our portfolio & planning strategy? Yes.

In the past, has it worked for investors to sell into a dropping market and wait for the recovery to reinvest? No. By and large, this results in buying high and selling low, a very destructive habit.

When it comes to observation, with the flood of market and economic news there are some factors which warrant further research and possible action. First, at some point company stocks become so cheap they are almost impossible to avoid attracting investor dollars. In Jason Zweig’s October 11, 2008 Wall Street Journal article he writes; “Out of 9,194 stocks tracked by Standard & Poor's Compustat research service, 3,518 are now trading at less than eight times their earnings over the past year -- or at levels less than half the long-term average valuation of the stock market as a whole. Nearly one in 10, or 876 stocks, trade below the value of their per-share holdings of cash ....” This certainly spells opportunity to buy quality companies at very low prices, particularly for clients who are in an accumulation phase. The other side of the coin is that many indicators point towards further economic recession. Bear in mind that the financial markets and economy do not always move in tandem; it is possible to have areas of the market do very well in recessionary times. We are reviewing tactical shifts and possible manager changes to position portfolios to take advantage of the opportunities presented as well as the probability of more recessionary times ahead.

Regarding “Plan,” the planning work we’ve done to this point has prevented clients from having to irreversibly change their long-term goals. In July, I gave a presentation at the Financial Planning Association’s NexGen national conference on managing the risk of concentrated stock positions in portfolios. While preparing, I uncovered numerous stories of those who had lost all because they were unwilling to follow some of the most basic portfolio tenets we practice; be diversified and, if withdrawals need to come out of the portfolio within the next 5 years, they should not be held in stocks. However, I believe that good financial planning is an ongoing dynamic process, not a static one. We will be working with you to update your long-term financial plan at your next meeting.

The past year’s events have once again confirmed in my mind the need and validity of our independent, fee-only advisory model. Noted money manager, Jeremy Grantham, mentioned what he calls the problem of Wall Street “career risk” in his October 2008 newsletter. He states; “It’s what I call the Goldman Sachs Effect: Goldman increased its leverage and profit margins shot into the atmosphere. Eager to keep up, other banks, with less talent and energy than Goldman, copied them with ultimately disastrous consequences.” Grantham goes on to describe how CEOs are typically picked for a number of attributes, but patience is not usually one of them. The Board of Directors and outside shareholders demand quarterly performance and want immediate results. The lack of long-term vision hampers prudent decision making. In the past, I worked for large financial services companies. While they do a lot of good work, it is impossible to overlook the conflicts of interest. Sales pitches are wrapped into, or often disguised as, financial advice and designed to enrich a sales-based agent, broker, internal product manager or the corporate shareholder. Designing and selling products is a fundamental part of our economy, however, the problem is in presenting a sales pitch as independent, objective advice.

I’ve been asked by several clients how we are doing. Cahill Financial Advisors is doing just fine. We have a strong client base that is well positioned to ride through an extended bear market. Our revenue will be down with the general decline in assets under management, but we are not beholden to outside shareholders and can stay focused on delivering prudent long-term investment management strategies. We are also experiencing a steady flow of new clients who are seeking financial planning and investment advice amidst the market turmoil.

We think it is crucial during this time of uncertainty that you are provided with as clear of a picture as possible of your financial situation: the structure of your portfolio, the implications of your debt holdings, tax situation, insurance coverage, real estate and, most importantly, how it all ties together in your long-term financial plan. If you have any uncertainty or feel that it would be helpful to meet for a review, please do not hesitate to call.

Thank you,

Scott D. Oeth, CFP®, ChFC