This is the question everyone really wants to know, so let’s review that by focusing on 3 primary asset allocation categories:
Stocks: The value of stocks are fundamentals based on the earnings a company make. Right now CEOs, analysts, portfolio managers, traders etc. cannot determine what a company will earn this year because of all of the uncertainty. Investors want to see a solid, consistent stream of earnings to determine the price of a stock. Given all the cancellations and social distancing, companies are trying to figure out how they can still make money while this pandemic lasts. That’s why the market is as volatile as it is. Until that point in time, we will continue to see volatility. Keep in mind, some people/companies panic, some have to sell and some believe they will just “wait until it bottoms” , how anyone could know that is essentially guessing!
Here just some simple reasons investors sell:
- They need the money (ask yourself do you need all of your money today?) – this causes a lot of the volatility. For example as hedge fund traders, frequency traders, companies who need liquidity today or in the near future dump stocks on a market that at the present time does not have adequate buyers.
- They don’t believe in the company any more (ask yourself do you believe in the companies /investments you own? Will those types of companies be around in 1-3-5 years and beyond?) – I can understand selling a stock like cruise line, but what about a company that manufacturers paper products or cleaning solutions? Sometimes when people sell, they sell it all out right or via an index, they end up selling the good ones with the bad ones.
- They are nervous (join the club, you don’t need to ask yourself that one): The market is driven by people who are buying and selling today, there are just not enough buyers – yet! Think about it, we are only adding a few percentage points to stocks right now. Prudent investing would not suggest doing more, but that doesn’t help the sellers who need to sell, at virtually any price. We fully appreciate and understand being nervous right now, but that’s where the next two asset classes come into play.
Bonds & Cash: These asset classes are used to absorb the volatility, protect the downside and provide you access to an asset class that is not down in value or not down near as much as stocks are.
For example: Assume this is your allocation prior to the market drop:
60% US Stocks
The answer all of us are searching for is “how long” will this last. And since we don’t know the answer to that we look to our allocation to see how best we can weather the storm while taking advantage of opportunities.
Questions for our consideration:
First – How much cash will you need access to in the next 12-24 months? Whether it is monthly income from your accounts, or the need to purchase something (i.e. car) or the amount you want to have as an emergency fund.
Second – Add up the cash you have in your savings accounts, in your Investment Accounts and in your allocation to bonds. That is approximately the amount that has not been as affected by the downturn.
Third – Now simply take the amount you may need from #1 and subtract that from #2. Any remaining funds could be a source of funds to be invested in quality stocks at these prices. If we can pick up some stocks that are 20-30% off their high, when they return to their prior values, we will be better off because we bought them at a 20-30% discount.
I know that is very simplistic, but that is the basic formula for all of us. We want to be sure that you feel comfortable for the foreseeable future. If you recall, the median downturn in a Bear Market is 35 Percent, the average duration is 14 months. We can weather this and take advantage of great opportunities if we continue to follow the process.
Please reach out to us any time with any questions, to review anything that may be on your mind.
We will get through this one, “yes we have never seen this before”, but we have said that before about all of the past 12 Bear Markets and we have made it through all of them.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Private Wealth Services, LLC. Undivided Wealth Management is a member firm of Kestra Private Wealth Services, LLC, an affiliate of Kestra IS. Undivided Wealth Management and Kestra IS are not affiliated.