Reinvesting When Terrified

GMO’s Jeremy Grantham penned this in early 2009, during the pits of the financial crisis. It’s even more relevant today than then.

My favorite quote:

Life is simple: if you invest too much too soon you will regret it; “How could you have done this with the economy so bad, the market in free fall, and the history books screaming about overruns?” On the other hand, if you invest too little after talking about handsome potential returns and the market rallies, you deserve to be shot.

Jeremy Grantham
ReinvestingWhenTerrified1

How to Invest in This Bear Market

The median time from entering a bear market to hitting its eventual low is 71 days. The median loss from historical bear markets is 32.9%.

The following is an excerpt from a piece I originally wrote for Kiplinger’s.

The stock market is centuries old and steeped in lore. No one really knows where its vocabulary comes from. It’s thought that the expression “bear market” comes from the way a bear’s claws strike downward, just as the term “bull market” comes from the upward motion of a bull thrusting its horns.

But the truth is that the expressions have been around for so long no one really knows who thought them up or what exactly the origins were.

The current bear market is young, and we don’t yet know how long it will last or how deep the losses will be. Given its record speed thus far, it wouldn’t be surprising if the recovery were equally fast. But it’s also entirely possible that the psychological trauma will cause it to be much worse. At this stage, there’s no real way to know. But we can use history, and numbers, as a guide.

According to data compiled by Dow Jones, the median number of days between the S&P 500 hitting its peak and hitting its eventual low was 187 days. And the median time from entering a bear market to hitting its eventual low was 71 days. The median loss in each bear market was 32.9%.

Those are just medians, of course. Some bear markets are quicker, some drag out much longer. Some barely qualify as bear markets, falling just more than 20%, while others drop much farther. For example, the bear market triggered by the 2008 financial crisis saw the S&P 500 lose 51.9% of its value, and the 1973-74 bear market wasn’t far behind it, shedding 48.2%. But the bear markets of the 1950s and 1960s saw declines of just 21.6% and 22.5%, respectively.

At the rate things are moving, these words will be out of date by the time they are printed, but as I write, the current bear market has the S&P 500 down about 26%, or about 7 percentage points above the median decline.

There’s no good historical precedent here. The current coronavirus scare has been likened to the Spanish flu of 1918, though it’s hard to consider that a good comparison given that World War I was ramping up. But for what it is worth, the Dow Industrials only dropped about 11% during the worst of the flu scare.

Now, we’re ready to talk about what to expect, and how to invest in this bear market.

To finish reading, please see How to Invest in This Bear Market.

Using an All-Weather Strategy During a Market Correction

An all-weather strategy keeps you diversified and helps to reduce drawdowns during a correction.

The following is a letter to investors I wrote with my colleagues at Robertson Wealth Management.

Summary

  • The stock market correction is the fastest in history.
  • This is precisely why it’s important to be proactive and make portfolio changes before the storm hits.
  • Robertson Wealth was prepared for this and has been transitioning clients to an All-Weather approach for months.

It’s not every day you get to experience a historic moment… even if it’s a moment you’d rather not experience.

It took the S&P 500 only six trading days to fall into correction territory last month, which smashed all previous records. (A decline of 10% or more from the highs is the technical definition of a stock market correction.)

On February 19, the S&P 500 was sitting at all-time highs. Sure, there was a little volatility about something called a “coronavirus” coming out of China. That has roiled the market in the final days of January. But it was assumed to be under control.

Then the news broke that coronavirus had spread to Europe… and it started. Stocks fell slightly on February 20. Then, the market dropped a full 1% on Friday February 21.

And then it got nasty.

The following Monday, the S&P 500 dropped by 3.35% and then fell by another 3.03% the next day. Two days later, it dropped by 4.2%.

It didn’t get much better in March. As if coronavirus wasn’t enough to deal with, OPEC and Russia’s deal to restrict crude oil supply broke down, leading Saudi Arabia to all but declare economic war on Russia by flooding the market with new supply.

Following the news, the price of West Texas intermediate crude dropped by over 24% on Monday after being down more than 30% at various points throughout the day. The volatility in the oil market spilled over into the stock market, culminating in the massive 7.60% drop in the S&P 500 on Monday March 9 – one of the worst single-day moves in history.

It’s amazing how quickly things can change, going from new highs to official correction territory in six days.

This is why it’s critical to be prepared before a crash hits.

Six months ago, we didn’t know that the coronavirus would wreak havoc on the economy, and we didn’t know that we’d be looking at another crude oil price war. But we did know that the stock market was looking extended and that stock prices were very high by historical standards, and we wanted to get ahead of any coming volatility.

For these reasons, we made the decision to transition most of our portfolios to an all-weather strategy. Over the past several months, we have been gradually transitioning most portfolios to a version of the all-weather strategy that best fits their risk profile.

In an all-weather approach, the portfolio is divided among different asset classes that tend to move independently, such stocks, bonds, real estate and commodities (including gold). When the portfolios get out of balance – such as during a stock market rout – the portfolios are rebalanced, selling off appreciated assets and reinvesting in the assets that have seen declines.

Over the past few weeks, we’ve made some notable changes. To start, we took profits in some of our longer-term bonds and reinvested the proceeds in shorter-term U.S. government T-bills. We’ve also been loading up the portfolios with high-quality blue-chip stocks. We wanted to own names with strong underlying businesses that would be less likely to take extreme damage and more likely to recover quickly from any setbacks.

We don’t know when this correction runs its course. It could be over already, or it could still have much further to fall. This remains to be seen.

But we were prepared for this possibility, and we’re ready for whatever comes next.

If you’d like for us to take a look at your portfolio, please contact our office.

The 11 Best (And 11 Worst) Stocks of the 11-Year Bull Market

The longest bull market in history may be coming to an end. Let’s look at its biggest winners — and its biggest losers.

The following first appeared on Kiplinger’s.

It might not feel like it right now, as the coronavirus panic is roiling the stock market. But we’re still technically in the longest bull market in history at 132 months and counting – a run that sent the best stocks of the group up by several thousand percent.

That might not be the case for much longer, but nothing lasts forever. This bull market is destined to come to an end, like all the rest. But it’s still worthwhile to stop and consider a run for stocks that shattered all longevity records.

The great 1990s bull market (the previous title holder) lasted 113 months and saw the S&P 500 advance by 417%. That market occurred during the dot-com era, of course, dominated by new technology stocks. The current bull market – which has seen the S&P 500 advance by 339% – hasn’t been quite as spectacular. But technology has been a big story here as well. Retail, medical devices and fintech also have a healthy representation among the biggest winners.

Interestingly, energy stocks, which are under intense pressure right now, were underperformers in both epic bull runs.

Today, on the 11th anniversary of the bull market, we’re going to take a look at the 11 best stocks over that stretch, as well as the 11 biggest losers. To allow for a bigger pool of stocks, we expanded the universe to the full Russell 1000 Index – the 1,000 largest companies in America’s equity market.

#11: PG&E

We’ll start with the laggards. Coming in at No. 11 is PG&E (PCG, $14.27), also known as Pacific Gas and Electric, which supplies natural gas and electricity to northern and central California. PG&E has declined by 59.8% since the bull market began, with most of the damage happening in just the past few years.

PG&E owns and operates 107,000 circuit miles of distribution lines, 50 transmission switching substations and 769 distribution substations. It also owns approximately 43,100 miles of natural gas distribution pipelines and assorted storage facilities.

A sleepy regional utility stock is generally a safe if somewhat boring investment. Unfortunately for PG&E shareholders, the company hit dire financial straits as a result of the wildfires that ravaged northern California in 2017 and 2018. Downed power lines owned by PG&E caused the fires that ultimately destroyed 14,000 homes and led to the deaths of 86 people. The company was forced to file for Chapter 11 bankruptcy protection in early 2019.

Given that shareholders are often wiped out in bankruptcy reorganizations, it’s impressive that PG&E isn’t down even more.

To finish reading, please see The 11 Best (And 11 Worst) Stocks of the 11-Year Bull Market.

Going to Cash

“Going to cash” can mean different things to different investors. Let’s cover a few scenarios.

A lot of investors are justifiably nervous. And as a result, many are thinking about how to go to cash following the quickest correction from all-time highs in the history of the stock market.

Selling some of your stocks and having a higher percentage of your portfolio in cash might end up being a fine idea, depending on what happens next in the markets. But as a general rule, it doesn’t pay to make sweeping portfolio changes, as there often are tax considerations and potential opportunity costs.

That doesn’t mean you have to sit on your hands and do nothing. In fact, a nasty stock correction can be a good opportunity to give your portfolio a critical look to see whether you should make any overdue adjustments.

“Ideally, you want to be allocated correctly going into a correction,” says Rachel Klinger, President of McCann Wealth Strategies, a Registered Investment Advisor based in State College, Pennsylvania. “You should have some portion of your portfolio invested in cash or equivalents precisely so you can take advantage of situations like these as they come up.”

“Furthermore,” she adds “with the yield curve as flat as it has been over the past year, cash or short-term T-bills make a lot of sense, at least relative to longer-dated bonds.”

To continue reading, please see How to Go to Cash.