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“The world is ruled by letting things take their course.”

– Lau-Tzu, ancient Chinese philosopher and writer

“This time it’s different,” someone once said while panicking out of the market in a time of crisis. At some level, investors know markets go up and markets draw down, just as the economy expands and the economy contracts. However, when people let their fear and uncertainty overwhelm them as they watch, in near real time, the value of their portfolio shrink, they are certain the bear market is different this time and they have to sell everything right now and sit on cash or they’ll lose it all.

This pandemic-driven bear market feels both fundamentally and fatally different. With its effect on the economy, we can’t estimate its influence on stock prices, determine if or by how much dividends might be cut, or predict if or when we will ever be back to a stable and growing economy. However, over our lifetimes and, in fact, our investing careers there have been three major crises that have delivered massive drops in market value. Each was radically different is its cause and details and, yet all were fleeting in their long-term effects.

The Global Financial Crisis (GFC) of 2008 – 2009 is considered by many economists to be the most serious financial crisis since the Great Depression of the 1930s. The causes of the GFC are many and varied: subprime lending, a housing bubble, weak or fraudulent underwriting practices, increased debt and overleveraging, financial innovation and complexity.  In response, the S&P 500 declined over 57%. Yet, from March 2009 to the most recent high in February 2020, the S&P 500 had an annualized compound return of 16.7%.

The 9/11 attacks on U.S. soil sent shock waves throughout the global markets. In the U.S., we feared the 9/11 attacks were just the beginning, and perhaps the next attack would be much worse. What you might not remember is the U.S. stock markets were closed for nearly a week. With the attacks and the stock markets closed, we thought that nothing would ever be the same.

What was truly a shock to investors was the market action on Monday, October 19, 1987. Although the markets had been trending lower for a few weeks before, nothing signaled what would be the largest single daily percentage drop in history. In one trading day, the market lost 20.5% of its value and over the previous 15 trading days the market lost 30.6%. Investors were scared. They didn’t understand what caused such a drop and wondered if this was the beginning of another Great Depression which started with the Crash of 1929.

Now, we find ourselves in the middle of a bear market that has dropped over 33% from its February highs. Further, although the economy is trying to come back, we still worry for our physical health and the health of our family members, parents, and kids. And, some of you may be thinking that it is different this time and wondering just how low might the market drop next.

So, what if the marker does go down again? First and foremost how low the stock market goes is both unknowable and, frankly, irrelevant. As a long-term, goal-focused, planning-driven investor over the long-term, you will experience such drops in the market that seem to come out of nowhere. But, here’s the first point, when stock prices are going down, the value of the underlying companies is going up. A market decline is therefore always to be experienced as a sale, and the very nature of sales is they are temporary. The lower prices go, the more value is to be had at those prices.

You instinctively know this about virtually everything else in your economic life. We might apply that same correct instinct to the stocks of America’s great companies.

Second, staying fully invested during temporary market declines is the only sure way to capture the fullness of the market’s advance. It is not possible consistently to sell out of falling markets, and later buy back into already advancing markets, thereby capturing the long-term returns of equities. Those returns are your reward for staying calm.

Third, you cannot make a long-term investment strategy out of short- to intermediate-term disruptions. We have a plan for getting you to the goals you need to reach, in order to secure a successful financial future. To achieve those goals, you need to invest consistently. And to stay invested for the long haul, not just when the sun is shining.

Fourth, perhaps more today than ever, bonds, CDs, and the like are not an alternative. They may have a role in your long-term portfolio, but they are not an alternative to equities. At the moment, the cash dividend of the S&P 500 is close to three times the yield on the 10-year Treasury note. Even if dividends were to halve in the current crisis, and interest rates stayed where they are, stocks would still yield more than the 10-year Treasury. Bonds are simply not a rational alternative to stocks for the long-term investor.

As always, we are honored and humbled you have given us the opportunity to serve as your financial advisor.  If you have any thoughts, questions, or concerns, please reach out to us. That’s what we’re here for.