April 4th

Good Saturday, Everyone.

As Winston Churchill said: “When you’re going through Hell, Keep on Moving!” (or close)

Another (un)helpful suggestion: “Cheer Up! Things could be worse. So, we cheered up – and sure enough, things got worse.” (Grim humor.)

We listened this week to a fascinating webcast presentation by Ed Lazear. Ed served as Chair of The Council of Economic Advisors for President GW Bush. Currently teaching at Stanford, he is also a member of the Board of Directors of the Dimensional Funds Group. During his tenure in government and subsequently on faculty, he has studied economic downturns, as well as the current crisis. This memo addresses his remarks on the markets and their fluctuation.

We speak of “Long-Term Investing,” and the consequent recommendation “Hold On!” Many of you have asked the central question in that: “How long? What if I do not have that time?” We understand and appreciate this issue; the answer depends upon the facts and circumstances of each individual situation. However, the market is not individualized. We heard a perspective on it with which we, in the main, agree. Here is the framework within which we are examining – and will review with you – the allocation for portfolios.

Two periods of time matter the most. The first is the time from the recent top to the bottom of  “the trough.” The second is the time after the trough until we recover our previous high prices. The bottom of the trough cannot come until the virus is at least leveled out. The recovery to earlier prices then begins. Lazear believes that the efforts to contain the virus will bear fruit by the beginning of the year 2021, but not before this fall. By the end of six quarters forward from now, recovery will be underway. That would be the summer of 2021. While the additional decline in prices between now and then can be – probably will be – painful, let us suppose that the “price recovery” in the stock market begins then. How much of the portfolio value will you have needed for personal use between now and then? And, what should be expected then? The first question is a cash flow planning question, which we have addressed with many of you. The second – what to expect – is more of a portfolio construction question. On this point, in addition to Lazear, we heard from Gerard O’Reilly, the Chief Investment Officer of Dimensional. DFA has have researched price behavior extensively and O’Reilly pointed out the following. The market has had 12 peaks since the end of WWII. The average performance of the market on a monthly basis, over that time, has been less than 1%. However, the average monthly performance in the 2-4 months around the peak has been negative 2.2%. Our recent experience has been worse than that. Then, in the 2-4 months around the trough, the average monthly performance has been positive 3.2%. In 2009, when the market came off its bottom, prices went up by 25% in two weeks. Clearly, the biggest changes occur around the peak and the trough. Having been there now for the former, we now want to be there for the latter.

How to be there? Well, first – how to hang on during the slide. One’s facts and circumstances control. Let’s talk about that if you have doubts or questions. Once the prices start up, one wants to be there. The best way to do that is to be there before it starts. Since we have no idea when that move will begin, the best way to be there before it starts is not to leave in the first place. So, we need to discuss the amount you want to have ready. The summary of the foregoing is – disciplineThe discipline to stay in the long term position to the extent that your personal situation permits, to think and plan carefully for that, and then to leave it alone. Not easy, but important.

Leave a Reply

Your email address will not be published.