So, remember all those times we’ve said that investment risks and expected rewards are related?
Coronavirus-fueled fears, driving economic insecurities, aggravating a host of simmering global sore spots, spiraling into stomach-wrenching market sell-offs…
Be it confirmed. Today’s unfolding news is the realization of those risks we’ve been talking about all along.
In case you’ve forgotten – or never experienced – what investment risk feels like, we reach out to you today with three encouraging thoughts, to help you face any challenges ahead.
1. For Real: Risks DO Drive Expected Returns
First, be assured, our advice on how to invest during volatile markets remains the same:
As a train needs its engine to move, markets require risks to drive them onward and upward.
Rather than spending too much time tracking passing headlines or watching every market move, consider reading a good book. For example, there’s Ben Carlson’s recently released “Don’t Fall For It: A Short History of Financial Scams.”
Carlson describes how the U.S. stock market (the S&P 500) has delivered a satisfying 9.5% annual return from 1928–2008. But during that time, there were only 3 years when returns hovered tamely between 9%–11%. Usually, annual returns deviated wildly from their norm.
So, yes, markets are risky. But here’s the reward to be expected in return: Most years (66 out of 91), steadfast investors earned positive returns, usually in the double-digits. Carlson concluded:
“Every successful investor must understand there is a sacred relationship between risk and reward. There is no proven way to earn a high return on your capital without taking some form of risk nor is it possible to completely extinguish risk from your investments.”
2. Preparation Beats Panic
It’s one thing to embrace abstract risk. It’s quite another to endure it for real. So, second, remember this:
You have never been more prepared than you are today for whatever happens next.
In other words, if you’re worrying that NOW is the time to do something about the markets, consider what we’ve already been doing all along.
We’ve already been helping you identify the right balance between your willingness, ability, and need to tolerate risks. We’ve already been working with you to create your own investment plan, with your assets allocated accordingly. We’ve already been building and managing your evidence-based, globally diversified portfolio to capture the market’s long-term expected returns.
In other words, you’re not only already “doing something,” that “something” is expected to remain your best strategy for riding out any bad news to come.
3. In the Face of Market Risks, We’ve Got Your Back
Now that investment risks are being realized, you may also be realizing your risk tolerance isn’t what you thought it would be. No shame, no blame. How could you have known in theory what your tolerances are for real? If you’re second-guessing yourself today, there are two possibilities:
You may be right. You may not be cut out financially and/or emotionally to withstand sustained risks to your investments. If this is the case, let’s revisit your plans, and talk about how to prudently adjust your risk exposures without sacrificing too many of your financial goals.
You may be wrong. It’s possible you are experiencing blind spot bias. That is, while we can often see when someone else is succumbing to an ill-advised behavior, such as fear or risk aversion, we often cannot see it when we’re experiencing it ourselves. Carlson addressed blind spot bias in his book. He pointed to research that has suggested, even once you know you have a blind spot, you still may not be able to overcome all the damaging biases you’re still not seeing.
That’s one of the primary reasons you’ve engaged us as your fiduciary financial planner. If the breaking news is leaving you feeling strained to a breaking point, here’s one fast action we recommend: Please be in touch with us immediately. Together, we’ll take an objective look at your thoughts, hopes, and fears. Together, we’ll continue to chart a sensible course forward.
Come what may in the days to come, we’re here for you now!
P.S. If you’re still reading and still wondering, “Yeah, but what happened today?!? It seems like the wheels fell off!”, we have some details for you. Financial markets constantly process new information as it becomes available, and a fresh story over the weekend was heaped on top of the growing coronavirus uncertainty.
Saudi Arabia launched an oil price war with Russia, after Russia’s refusal to cut production. Combined with already weakened demand due to the coronavirus, the supply-side shock sent the crude oil price plummeting over 30% this morning. Low oil prices would mean cheaper gas prices for consumers, but there would be a significant negative impact on oil producers, drilling and production companies, and the massive U.S. shale industry. Already facing plenty of uncertainty, rattled stock markets around the globe dropped sharply (down 7%+).
While we now have two major clouds (oil and virus) hanging over the world economy and financial markets, the ultimate impact remains unclear. The possibility of a recession starting in 2020 seems more likely, which is why markets responded so severely. However, we should recognize that all recessions are definitely not the same.
The “Great” recession of 2008/2009 coincided with one of the worst financial crises in history. That was clearly an anomaly and not the standard. Excessive debt levels exacerbated the last recession, and the same is not true today. The two recessions prior to 2008 lasted less than a year, and 5 of the past 11 recessions had double-digit stock gains during the recession. The markets and the economic cycle rarely coincide, so we can never be certain how stocks will fare. We do know, however, that markets can recover as quickly as the sun breaks through the clouds.
It’s important to acknowledge, once again, that market declines come with the territory of stock investing. A 15% decline happens, on average, about once every two years. That’s the “risk” side of the dreaded risk-return equation. The reward comes from riding out the fluctuations to capture the long-term returns. It’s never fun or easy, but it’s been part of the investment experience from the start.
On the bright side, it’s another opportunity to offer kudos to those often-underappreciated bonds!