We continue to make more money when snoring than when active. - Warren Buffett
In a recent newsletter post in mid-March of this year I urged readers to do the most difficult thing during a time of incredible upheaval in financial markets - nothing. The markets bottomed just a couple days later and since then are up greater than 40%. Hopefully if you read my newsletter that week you also either heeded my advice or did nothing to change the direction decided on when you dispassionately planned for your retirement. Regardless, the lesson we again learned is that control over emotions is more important than financial sophistication when investing.
First, an acknowledgement that I knew nothing about the timing of the markets’ trough or subsequent recovery when I wrote the newsletter. What I knew from twenty-five years of previous experience is that no one knows when a peak or trough occurs - so it’s folly to think you can predict it. As a result, good investing behavior is to ride out declines while the best behavior is to pull out dry powder during downturns and put it to work at lower prices. By definition, that is very, very hard to do…
While financial markets have bottomed and the S&P 500 has recovered to almost pre-virus levels – the same cannot yet be said for the economy. A frequent question I have heard since the March bottom is: Why do financial markets seem to be disconnected from the economy?
A couple thoughts:
1) Economic data is backward looking but financial markets are looking far into the future. Markets are telling us they believe better times are ahead – while acknowledging earnings will be awful in the next year or so. Unexpectedly good unemployment data which came out a couple weeks ago tell us that markets were right in anticipating a recovery.
2) Bond yields for most maturities are less than 1%. Would you rather own a bond paying you 1% for 15 years or a stock which pays 3% and will fluctuate in price during the same time frame? Markets are answering this for us…
3) The Fed has unloaded a ton of stimulus to individuals and businesses and is promising unlimited additional amounts if necessary. This money has and will continue to make its way into financial markets.
4) Indicators of life getting back to normal such as gas demand, restaurants visits, increases in flights and hotel bookings are improving. In addition, investors hope for successful therapy and effective vaccines in coming months.
Finally, I have no idea what to expect for markets in the coming months. However, over the next decade I am very confident that markets will be up a LOT from these levels. I’d suggest that investors are best served by working with an experienced financial advisor who will help them make good decisions about asset allocation, social security and reasonable levels of income to expect in retirement given their current investable assets. I’d also suggest investing in very broad indexes which include small companies, value, and exposure to international and emerging markets as well.