Coronavirus Update from the Investment Department: Our Top Priorities Right Now
We hope you are all doing ok and staying safe during this crazy time. Although we are working remotely, we are still hard at work managing your portfolios and the administrators are hard at work ensuring that you get what you need when you need it.
The stock and bond markets have been on a wild ride (both down and up), and we expect this volatility to continue as long as the Coronavirus is disrupting the world’s economies. The natural question that comes to mind is, “what are we doing about it?”
Our top priorities as an investment group are:
- Ensuring that clients have adequate cash and/or highly liquid safe assets for any unforeseen emergencies that may come up as a result of the economic disruption. We realize that the statewide (and mostly nationwide) lockdown has adversely impacted many businesses – particularly in the hospitality and retail industries – and millions of people are suddenly out of work. This may also be having an impact on you, and we want to make sure that you can quickly access cash if you need it.
- Scouring our portfolios for any stocks or bonds that could suffer permanent damage from the economic slowdown. While our investment philosophy favors companies that are resilient through a variety of business conditions, this situation is different than almost every other economic disruption we have seen, and a company that was otherwise strong and profitable may not be able to effectively weather this particular storm. We recently sold two stocks from our Global Value Strategy that we feel have the most risk for “permanent damage,” and we will remain diligent as the economic effects from this disease unfold over time.
- Looking at current asset allocations to see if it is time to rebalance. Since stocks have fallen more steeply than bonds during the month of March, many portfolios are now showing stock allocations that have drifted below what is specified in your investment policy statements. If the current stock allocation is more than five percentage points below the investment policy, then we would look at rebalancing – i.e., selling some bonds and/or bond funds to buy stocks and/or stock funds to bring the portfolio back into balance. Right now, that doesn’t feel very good, but rebalancing never feels good because you have to sell assets that are going up and buy assets that are falling. We won’t necessarily do it all at once, though. Given the volatile market, there is no rush, and we will most likely do it at a gradual pace.
Note that none of these priorities involves trying to guess where the market is going next week, or even next year. We are not in the business of market timing. Consequently, we probably won’t “pick the bottom” when rebalancing – it might take a few more tries if stocks fall lower. That’s ok, because rebalancing is not a market-timing decision, it is an investment policy decision. As we mentioned in our initial post about the Coronavirus, your investment policy is designed with these types of market downturns in mind (yes, even this one!) In fact, rebalancing is part of what makes the investment policy effective – it takes the fear and emotion out of the decision-making process.
And, “raising cash” does not mean “changing investment policy.” Any incremental cash raise will conform to your asset allocation guidelines. Your investment policy is driven by your financial plan and, if applicable, the trust document. It is not a guess on where the S&P 500 will be next month. If your situation has had a major recent change that we aren’t aware of (e.g., you lost your job, or are buying a house), then please contact your administrator and we can make the necessary adjustments.
We will share more detailed thoughts on the market in our forthcoming First Quarter Review, which we will send out in early April. Until then, stay safe and wash your hands!