Broker Check

2020 First Quarter Wrap-Up

 Looking Back and Looking Forward


By:  James C. Denton, CFP®, Managing Partner

April 8, 2020


If you haven’t seen them already, your first quarter investment reports will be showing up in your mail over the next few days.  My advice … ignore them.  Don’t open them.  Nothing good will come from that.  After all, what are they going to tell you that you don’t already know?


Here’s some context.  What this report represents is a snapshot taken at an arbitrary point in time in the midst of the mother of all “black swan”[1] events.  In other words, by definition, temporary, and probably, almost certainly, not an accurate or reliable indication of your true financial situation.  Now you might say to me, that’s always the case, and I would reply … Exactly!  You should never get all that excited, either for better or worse, over a single statement or investment report, or what Jim Cramer[2] has to say on his nightly show about what happened on a specific day, or even over a given month.  It is always only a point in time, a way point on a journey. 


So, take the time you would have spent reviewing those largely irrelevant reports, and spend it instead reviewing and trying to make sense of what I have to say here.  This is going to be a fairly long newsletter, I know it before I even get started, but I have much to say which I believe is worth your time in understanding and digesting – more so than the same amount of time spent with those quarterly reports.  Understanding and internalizing the concepts and lessons learned from this event will be of value to you long after those arbitrary, snapshot, black-swan-driven reports lose whatever relevance they may have had.   


So back to the journey … what kind of progress are we making on your journey?  As of last Friday’s close, the 10-year average annual return of all three of the major indices was ~10% or better[3].  Now this might be what some would consider putting lipstick on a pig but stick with me here.  If you are living off of your investments, and you are withdrawing something less than 5% per year (which is always our recommendation, by the way) then your account should be growing OVER TIME in spite of these unexpected short term events that are disconcerting, no doubt, but in the greater scheme of things, unavoidable.  If, as are most of you, you are not yet dependent on your investments for income, so much the better. 


Remember, on day one of our relationship, and regularly ever since, I have told you two things I think you can hang on to, that you can count on.  First, the market has good days, the market has bad days, and the market goes up.  Clearly the short-term fluctuations will happen, but as often as not, those fluctuations are positive, and again, over time, they work themselves out in your favor.  And secondly, I told you with a reasonably diversified portfolio, and responsible asset management historically investors can expect an average return OVER TIME of around 8 to 9%.  So once again, with a withdrawal rate at less than 5%, you have portfolio growth that can yield steadily increasing income based on that 5% withdrawal rate.


In this context, I often tell new clients and old, prospects, competitors, new advisors and coworkers, “We do two things:  We manage portfolios, and we manage expectations.”  I think we do both pretty well.  For those who have been with us a while, the results of the former speak for themselves, and if you don’t agree, that’s a conversation I’m dying to have because I think you’re missing something!  As for the latter, managing expectations is every bit as critical to the process.  If our expectations, yours’ or mine, are unreasonable, we are going to make mistakes when they go unmet.  If they are reasonable, then we don’t get too excited either by the good days or the bad, we keep our “eyes on the prize” and the prize is the long-term OVER TIME performance.  And 8 to 10% ain’t bad.


All of this so far is generic same old same old expectations management stuff.  Let’s talk specifics for a few minutes.  I get this comment every now and then in one form or another, “Your newsletters always say one of two things:  if we are in a downturn you say “Stay the course”;  and if we are not in a downturn, you say “A correction is on the way.”   My response?  “Sounds like good advice to me”, and in any event, I am nothing if not consistent.  Managing portfolios and managing expectations.  If we are not in a correction, there’s one out there somewhere.  Forewarned is forearmed.  And whether we are in one or not, over-reacting is never a good response.  But what, specifically, should we be doing?


When I tell you to “stand pat”, stick to your plan, stay the course, that doesn’t mean “do nothing”.  The best thing you can do in the current circumstances may be to write a check.  If you could buy a $100K BMW for $70K, you’d probably try to find a way to do so wouldn’t you?  Especially if you needed a new car.  Well there are a lot of good stock investment values out there on sale right now for 70 to 80 cents on the dollar and I would suggest that upgrading your investment portfolio is almost always a better idea than upgrading your ride.


Unfortunately, many of you are not in a position to take advantage of the opportunity – you were already “all in” and I respect that.  But even among those who might be able to write a check, it’s really hard to do so in these kinds of circumstances.  I get that too.  Once again, however, “stand pat” does not mean “do nothing”, and it certainly doesn’t mean that we are doing nothing here. 


What we have been, and what we are doing:  I’ve gotten a few phone calls – not all that many, actually, but a few, asking me, after I told you to “hang in there”, “you only lose money when you sell”, etc., why I have been selling investments.  One very good question from a well-informed investor who’s opinion is always valuable to me: “If (XYZ) stock was a good investment in mid-February at $167, why did you sell it at the end of March for $88?”  The answer is a simple one … The single thing we have been most intentional about is taking advantage of really low prices where we see them.  In order to do so, if you can’t come up with the funds, we will.  Follow …


Very early in the process, we identified those positions we had with which we weren’t really optimistic.  That didn’t take long and didn’t yield a lot of liquidity.  We had very few stocks which didn’t really feel good to us.  But there are bargains better than others, there are always going to be stocks which will go down more than they should, and some which will recover faster and better than others.  So, we have been selling “good stuff” to buy better.  In the conversation mentioned above, XYZ, a good long term stock which I might buy back at some point in the future, had not really been doing as well as expected leading up to this correction, and wasn’t, in my judgment, positioned in any significant way to benefit or recover quickly from the correction.  This is merely one example of the kinds of decisions we have to make – selling XYZ was not a panic reaction to a 50% price reduction, but rather a cold, hard, business decision that the funds remaining after the correction would recover better in (ABC) or (DEF), etc.


What you can, and should think about doing …


  • If you can write a check, write it! Bargains abound and should continue to exist even as the market begins to recover.  Not all good stocks will recover at the same rate.
  • If you don’t have to write a check, don’t write it. In other words, don’t take money from your investments that you don’t absolutely have to.  Avoid the discretionary spending.  You might say “if I see a $100K BMW on sale for $70K, I’m gonna buy it” but if I have to sell $100K worth of stock in order to net you the $70K, then the car is still costing you $100K (or more).
  • If you are on a systematic withdrawal plan – taking regular income from your investments – think about reducing your income if at all possible. This is especially important if your withdrawal rate is above 5% (which it may be temporarily because of current events), but even if not all that essential now, may forestall an even more difficult adjustment later on.  This adjustment may actually be easier than you might think because our “shelter in place” existence right now is reducing our expenses while for retirees, your other income sources – social security and pensions, etc., - are probably fairly reliable at pre-crisis levels.


And finally – required minimum distributions for the over 70 crowd have been suspended this year.  No one has to take an RMD this year, so we will not be pushing them out as we normally do, and if you have one scheduled, we will probably be reaching out to you to cancel or reduce it for this year.


OK, I told you this was going to be long, and I’ve jettisoned a lot of really good notes that I originally planned to include.  I’ll save those thoughts for our personal conversations.  Call me if you want to talk, discuss, especially if there is something specific going on in your world that I can help you with.


Most of all … stay home and stay healthy.  Current indications seem to be that we are starting to assert some measure of control over this bug, but it’s going to take some time and patience.  Let’s not get into too big of a hurry to revert back to our pre-crisis lifestyles.  If you think about it, most of us have a pretty blessed life – an enjoyable “journey” as it were, and this is just a temporary setback that, like those quarterly statements you’re now ignoring, will soon fade into just another memory.

[1] What is a “black swan” event?  Have you ever seen a black swan?  I haven’t but evidently they do exist, although exceptionally rare, and therefore unexpected when they occur.  According to Wikipedia, “The black swan theory or theory of black swan events is a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalised after the fact with the benefit of hindsight. The term is based on an ancient saying that presumed black swans did not exist, a saying that became reinterpreted to teach a different lesson after black swans were discovered in the wild.”

[2] I didn’t say “don’t listen” to Jim;  He’s a lot smarter than I am, more knowledgeable for sure, but keep what he says in context, macro-circumstances as well as your own, and don’t over react for better or worse.

[3] Source:  First Trust



The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by LPL Financial. The material is for informational purposes only. All performance referenced is historical and is no guarantee of future results.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

This information is not intended to be investment advice for any individual.  You should consult with your personal investment advisor before making any decisions based on this material.