“The optimist sees the doughnut; the pessimist sees the hole.” ― Oscar Wilde

“If you change the way you look at things, the things you look at change.” ― Wayne Dyer

Over the past several weeks we all have been inundated with information and news, both on the COVID-19’s ability to create a devastating health crisis, and its calamitous toll on the economy and the markets. Investors are navigating uncharted waters.

How much damage may yet be done to the financial markets?

With the Dow Jones Index already down 35% from the February 19th high, and 24.5% for the month of March—on pace for its worst month since the since the Great Depression—can it go lower? Unfortunately, it can.

The direction of the markets in the days, weeks, and months to come will be driven by many variables, including:

  • Investors’ fears;
  • The effectiveness of governmental policies aimed at stopping the spread of the virus and treating those infected;
  • The scope, magnitude and design of a stimulus package; and ultimately,
  • The trajectory of the contagion’s spread.

That trajectory won’t be known for weeks, perhaps months. Governmental policy responses and the stimulus package—needed now—could be announced this week. Many believe that until we know the extent of the pandemic’s impact on the economy, investors will struggle to assess the adequacy of any policy response. This continued uncertainty may leave investors still fearful of the markets. We may be able to control our own fears—we cannot control the fears of others.

What should investors do?

The answer is a matter of perspective and circumstance. If you are focused on avoiding further losses that may materialize in the coming days and weeks, then reducing your exposure to the stock market might be appropriate. Getting out of a significantly down market and then buying back in at an appropriate time to recoup your losses is a very difficult task, perhaps an impossible one. Determine now the triggers having you buying back in, e.g., the S&P 500 trading when down another X%; or if you miss the bottom, when the index is up Y%.

While no one wants to incur further losses, how do you determine if you can “afford” to continue to wait things out? Ultimately, if you do not have sufficient cash or bonds to supplement your other income sources to meet cash flow needs for the next 2-5 years (or a longer period of time consistent with your tolerance for investment risk), then you may want to consider selling some stock now to build an “income buffer”.

If you do have more assets than necessary as an income buffer, look at the markets with a slightly different perspective: Where do you think the economy and the stock market will be in 12-18 months?

We at NWCM are optimists (and capitalists) at heart. We think the economy and financial markets will be in better shape then—and certainly less volatile. If you are of the same opinion, efforts to predict near-term market action, e.g., where is the bottom?, are less critical. Of more importance today is assessing your cash and bond holdings—the income buffer for covering your expenses for the number of years you determine is necessary.

NWCM believes that when we look back on this crisis, the best approach will have been for investors to have done two things:

  1. They ensured their portfolios contained enough non-stock assets to serve as their income buffer; and
  2. They positioned appropriately remaining assets to participate in the inevitable recovery of stock prices.

We are here to help!

If you want to discuss or review the adequacy of your income buffer, please call us. Our financial planning software—Big Picture Study®—really does shine as a tool to clearly illustrate your cashflow needs. In a world dominated by social distancing, we can meet via phone call or video conferencing.

For Client assets that can be invested for the long-term, we will be managing them to participate in the recovery—whenever that might materialize. We have no delusions in our ability to predict the bottom of this crisis. (We consider that to be a fool’s errand.) However, we will be gradually adding to stocks on down market days to rebalance our Clients’ portfolios back to their target allocations.

If this crisis makes you wish to take an approach different from what we’ve outlined above, please contact us. We are happy to adjust your portfolio’s allocation in a way that makes the most sense to you.

We wish you and your families all the best during these difficult times.