On behalf of our team at Ridgeline Financial Partners, I personally want to thank you for your partnership and the confidence you instill in us to guide you through life’s stages. A lot of you may receive information from us outside of our planned reviews by way of our newsletters and commentary provided after our quarterly investment policy committee meetings. When we have periods like the last week or two, we want to let you know we are here to be the anchor that you may need to avoid drifting off course. We also want you to know we share your concerns, but our long-term outlook remains unchanged. We continue to believe in global capital markets and the importance of diversification.
Our theme over the past couple of quarters has been that we continue to maintain a long-term outlook on global markets and seek opportunities presented by more value driven investments to present greater growth potential than safer asset classes like corporate bonds or government debt. We believe there is an increasing value premium in the markets that has been created by higher than historic valuations and forward-looking earnings projections. The market, domestically speaking, has been driven by a small group of high growth momentum names (think Tesla, Netflix, Amazon as examples). A lot of the names that you are familiar with are trading at lofty levels based on the potential for incredible future growth, even in light of a lack of profitability. I firmly believe in owning a company with a history of positive cash flow and dividends rather than a company with the potential to be profitable.
My investment philosophy is one that I can credit largely to Warren Buffett, who once said, “It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." No one saw the coronavirus coming and gauging the extent of the spread is still difficult to ascertain. There have been ongoing concerns about a correction percolating before the coronavirus, so this doesn’t come as too much of a surprise. The recent sharp market sell-off and increase in volatility can predominantly be attributed to the global slowdown out of fear of the virus’s impact.
The below chart from Reuters highlights just how fast this virus has travelled when compared to SARS and MERS.
Source: Reuters Graphics, February 8, 2020
Coronavirus, when looked at comparatively to past global pandemics
The chart below provided by Charles Schwab gives you a glimpse as to how global markets performed in the 1, 3, and 6 months after the outbreak of past diseases. My first takeaway was that results were mixed, and expectedly so, as the overall state of the global markets leading to that point needs to be taken into consideration. But if history is our guide and we are confident in the world’s ability to come up with a vaccination and to slow its transmission, we have to feel equally confident in the global stock market’s resiliency. As it often is during periods like this, it is not as much of a matter of if, but a matter of when, markets will rebound.
Source: Charles Schwab, Factset data as of 1/21/2020. MSCI World IndexSM - is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance. As of December 2003 the MSCI World Index consisted of the following 23 developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States.
What we are encouraging our clients to do at different stages (assuming A65 retirement date)
This could present one of the better buying opportunities that we may see for years to come. If you are sitting on idle cash that is not intended for the short term or to fund your emergency reserves, this could be a good entry point to buy a diversified mix of dividend-paying stocks. If you have a more conservative portfolio and the time horizon until you need your investments is beyond 3-5 years, it may make sense to look at allocating some of your portfolio into stocks for the same reason. We also recommend a rebalance of your portfolio. Take this as an example…you may have a portfolio of 75% stocks and 25% bonds. Because of the sharp downward movement of stocks, your portfolio may have readjusted to 65% stocks and 35% bonds as bonds have held up relative to stocks. It may be a great time to sell out of your bond funds and reallocate into stocks. We do not know where the bottom is, but we always like a 15% discount to trading levels from two weeks ago. If you can, accelerate retirement, educational, and goal-purposes investments.
We still see a buying opportunity for those of you with retirement in your sight range, but we wouldn’t stretch too far with increasing risk outside of your comfort level. We again would encourage a rebalance and would consider investing idle and uncommitted cash, but we would likely do so with additional diversification outside of stocks. Real estate, private equity, and less interest sensitive forms of fixed income should be considered. You have less time to recover from a substantial economic downturn and ideally asset classes that are not correlated to the market will provide some stability for the next bout of volatility. If you are self-employed or a business owner we would encourage the acceleration of retirement contributions to capitalize on the sell-off, if possible.
Ages 60-65 and beyond:
We serve a number of clients in this age range and this is the group that we hear from most during these periods. We continue to advocate diversification with value investing at the core of the foundation of our firm-level managed portfolios coupled with a fixed income allocation that is more defensive and less susceptible to credit or interest rate risk. If you do not have a plan for funding 12-18 months of expenses from your portfolio, or you are unsure of what you have in your portfolio that can be accessed with limited loss during these periods, I encourage you to contact us. We try to position portfolios to have the liquidity and stability in areas to provide current income to those of you dependent on it. We will shy away from selling out of the market, if possible, at this time and rebalance when we see fit to get the portfolio back in alignment.
Our doors are open and we welcome your calls, messages, and visits. We continue to abide by the wisdom of the great portfolio manager Peter Lynch of Fidelity Magellan fame at times like these: "Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." The practice of financial planning is a marathon and not a sprint and we thank you again for allowing us to be along for the ride. It is not always smooth sailing but much as we have in the past, we will navigate these choppy waters and not lose sight of the goals you have shared with us.
Past performance is not indicative of future results. Different investments involve varying degrees of risk. The information in this commentary does not constitute personalized investment advice.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA (www.finra.org)/SIPC (www.sipc.org). Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Kestra IS and Kestra AS are not affiliated with Ridgeline Financial Partners LLC or Carbray Staunton Financial Partners LLC. Neither Kestra IS or Kestra AS provide legal or tax advice.