Soaring unemployment. Bailouts and stimulus packages. Panic on Wall Street and Main Street. As we inch further, week by week, into 2020 we are reminded again of past recessions. Are we heading towards a 2008 reprise? Could it be even worse this time? Where we are going is yet to be determined, as most of us have seen the 30-day social distancing guidelines extended indefinitely. While the immediate future is uncertain, the past is not. We know where we have been. We know what happened to get us there, and most importantly, we know what it took to recover. Like most “black swan” events, such as our current pandemic, there is no playbook. We don’t have a roadmap of how to maneuver these conditions, and each day we are learning how to navigate the health crisis while also not losing sight of our economy and infrastructure. Leaders all over the globe at every level of government and business are playing a real-life game of Jenga®, attempting to strategically make a necessary move, without the whole tower collapsing.
Is 2020 the next 2008? While others continue to look forward and navigate us where we need to go, it’s important to recollect where we have been. If you joined us for your portfolio review meeting last fall, you may have heard us talk of the lessons that we have learned from 2008. So, is 2020 the next 2008? In short, no; most investors have learned from the Great Recession and corrected many of their flaws.
As an investor, what were the key 2008 takeaways?
· Diversification matters.
· Expect the unexpected
· Be patient and do not panic,
· But also, be courageous when others are not.
Diversification matters. Having the chance to work alongside Dr. Harry Markowitz, the Nobel-prize winning economist that first put forward the concept of Modern Portfolio Theory, diversification matters to us. We have built your portfolio to be as diversified as possible, while also keeping things like cost, tax efficiency, and liquidity in mind. An explosion of new investment vehicles, primarily Exchange Traded Funds (ETF’s) has opened the door for a new level of diversification that we didn’t have in the past. We have seen a migration of money away from mutual fund managers to these new funds, which has allowed mutual fund managers to become much more efficient than they were in the past, navigating choppy conditions with much more finesse. We have married these two investment styles so what we have now are efficient and well-diversified portfolio’s when it matters most.
Expect the unexpected. A “Black Swan” event by definition is unpredictable. We have seen them in the past, we will see them in the future. We have to prepare for their existence at all times, but also understand their longer-term implications are much less significant than it feels at the moment they appear. Over the past 20 years, we have lived through events such as The Dot-Com crash (2000), 9/11 (2001), the Great Recession (2008-2009), Chinese Black Monday (2015), and BREXIT (2016) among many others. We have heard that “all good things must come to end,” but just as important, all bad times will come and go. As your advisor we will continue to help you trudge forward through these times. We will be excited to get to the other side. And, as a result of what we learned from the past, we will continue to prepare for what’s lurking around the next corner.
Be patient and do not panic. By the depths of the last recession early in 2009, we had seen the major stock indexes cut over 50% of their pre-recession values. With that pain, people had abandoned hope of the future. They had cashed in their retirement plans, sold all their investments, and succumbed to the panic. Many had endured the three long years of the dot-com crash, then subsequently, three more years of recovery to finally climb back to the new highs of 2007, just to see it disappear again in 2008 and 2009. It was easy to give up. It was easy to say I refuse to ever lose anything again, and that is what people did. They were so exhausted that rather than allow themselves to recover financially, they decided to sit on the sidelines and wait this one out. They allowed their life savings to flat-line, while everyone else’s were being resuscitated. This leads to the final point…
Be courageous when others are not. There is a saying that “Bull markets will make you money, but Bear markets will make you rich.” How does a bear market make you rich? Courage. For some, it means buying when others are selling. For most, courage simply means sticking to the plan, not sitting it out. It takes courage to know there is an end of the tunnel, when there is no light to be seen.
2020 is not 2008 for so many reasons. Basic reasons like demographics and investment styles will naturally lead to this taking us down a different path. The more rational investor will understand that the origin of 2008 is much different than what we are seeing now. Will 2020 be worse than 2008? Only time will tell. We do know that past lessons learned will still have long term benefits even when the short term seems bleak.
If you feel like you are losing courage and patience, let’s talk. If you feel like you are at the point of hitting the panic button, we will listen. We have appreciated the feedback we have received from many of you. And we look forward to getting together soon so we can talk through what’s on your mind. Until then, we hope that you and your family continue to stay safe and healthy.
Ryan Flanders, CFA