A Message to Our Clients
We fully recognize the continued uncertainty around Coronavirus is stressful and the recent market volatility may be causing additional anxiety. We are parents, children, and siblings too, not to mention investors, and feel the pain as well. Firstly, we want to assure you that we are monitoring the situation very closely. We are making sure portfolios are allocated appropriately for your long-term goals and short-term needs. Moreover, we are combing through various sectors to find future opportunities, and we are in contact with our outside investment managers.
Investing for the long term vs. speculation
Some of you may be wondering if you need to “get out” of the market, while others may be wondering if now might be the time to “jump back in.” We DO NOT recommend clients attempt to “time the market” – that is nothing more than a typically unsuccessful way of speculating on the short term (when markets are the most irrational), rather than investing for the long term. Instead, in these moments it is critical to remember what you are investing for and why you own a well-diversified portfolio.
For clients with longer investment horizons, your portfolios will tend to have a higher allocation to global equities. An inherent component of equities’ higher returns is the higher risk of volatility. Last year we saw incredible returns in global equity markets without a significant “risk-off” episode; that was never going to be sustainable in the long run. However, despite going through similarly volatile episodes in the past, markets have rewarded the owners of companies (i.e. equity investors) more than those that lend to them (i.e. bond investors), or those that remain on the sidelines (exposed to inflation) in cash.
We stress, as we have in the past, that if markets sell off in the short term, you have not “lost” anything. You “lose money” if you sell in these moments. Market drawdowns can be rapid, but so can the recoveries. If you sell out at the bottom rather than simply staying invested, you run the risk of missing the recovery, permanently damaging your portfolio.
Liquidity in the short term
For clients with shorter investment horizons and/or liquidity needs, moments like this are why we maintain exposure to fixed income (even though it does not offer long-term returns as attractive as equities). While stocks have sold off amid Coronavirus fears and now a “price war” in oil markets, high-quality bonds are rallying around the world, pushing yields to all-time lows. Rather than sell stocks at the worst possible moment, we can source liquidity from these bonds and bond funds.
Furthermore, regardless of how aggressive your portfolio might be, we diversify not just across markets and sectors, but also management styles. If you hold a passive index, your return is the market (up or down). In contrast, our active managers, many of whom had been more conservative leading up to this current rout (as markets calmly pushed passed new record highs), have cash on hand that they are able to deploy selectively as shares of (and even some bonds of) quality companies go on sale.
Volatility is here to stay, and diversification can help protect against it
There is no way to say with certainty when the current market turbulence will subside to more normal levels. The full economic effect of the virus is still unclear, but it will almost certainly affect revenues, meaning we will most likely see negative earnings revisions in the near term. While the “price war” in oil may be peaceably resolved soon, there are still plenty of other sources of volatility, least of all the run-up to the general election in the United States.
However, while we cannot predict the short term, we can make sure we get the long-term decisions right by targeting the appropriate portfolio asset allocation and periodically rebalancing to it. We have seen diversification protect against the permanent loss of capital time and time again, and we wholeheartedly believe it will protect against it now.
SOL Capital is ready
Lastly, we want to point out that SOL Capital and our custodians maintain robust business resiliency plans so we may continue to service our clients should more restrictive quarantine guidelines be imposed.
Please reach out to us if you have any questions or concerns. We are here to help you!
The SOL Capital Team