“Wilson! Where you goin’?
“You idiot! Get back in there at once and SELL! SELL!
- Don Ameche and Ralph Bellamy in “Trading Places”
If you’ve ever watched this 1983 classic comedy also starring Dan Aykroyd, Eddie Murphy and Jamie Lee Curtis, you remember the scene where the Duke brothers have given their trader incorrect instructions to buy at the open and keep buying no matter what. Only when they realize their error do they make a panicked trip to the trading floor in a futile effort to get their beleaguered trader to sell everything before it’s too late. Of course, it doesn’t work, and the Duke brothers lose everything.
I’m reminded of that scene after seeing the market decline about 3.5% yesterday and watching the 8.5% rebound today. This kind of volatility makes everyone uncertain about when to sell or when to buy. And that’s why we choose a strategy of asset allocation, or dividing percentages of your portfolio among different categories, as opposed to market timing, which focuses on trying to predict how stock prices will move. Simply, we follow the percentages we’ve assigned, or allocated, to each portfolio category. We BUY when our allocation tells us to and we SELL when our allocation tells us to.
The other challenge is what we sometimes refer to as “true risk tolerance.” Everyone is fine with a large allocation (greater percentage) to stocks as long as the market is going up. But suddenly, when markets turn, we think about changing our asset allocation with the idea of moving it back when things get better. But really, this is nothing more than a market-timing strategy disguised as an asset-allocation adjustment. Our advice in these situations is to honestly assess what your true risk tolerance is, in good AND bad times. If your allocation needs to be adjusted, then do it, but only if you can imagine yourself comfortable staying there when the market recovers and begins to go back up again.
Best insight I’ve read today
From Cornerstone Macro: “Selloffs end when the problem that caused the selloff is under control.”
It’s probably really that simple. While fiscal stimulus from Congress, and monetary stimulus from the Federal Reserve, is vital to maintaining the economy, neither one fixes the underlying problem.
We are watching the number of COVID-19 cases very closely and think the stock market will find a bottom once we have some confirmation that the growth rate in new cases is shrinking. In other words, the number of new daily cases needs to get smaller on a consistent basis. The worldometers.info/coronavirus site is a good place to track this.
Fiscal stimulus package
Markets are rallying on hopes that a fiscal stimulus package will be passed sooner rather than later. Some key provisions:
- The proposal calls for a one-time payment of $1,200 per adult, $2,400 per couple and up to $3,000 for a family of four. Democrats are proposing up to $1,500 per person, with higher earners (over $75,000) required to pay it back over three years.
- Small businesses can receive up to eight weeks of assistance in the form of forgivable loans to keep employees on the payroll. Other costs like mortgage, rent and utilities would be forgiven.
- The bill includes $242 billion in additional emergency appropriations to fight the virus and shore up safety net programs.
- The Senate version also includes over $200 billion in direct aid to large companies like airlines, although that money would have to be repaid over time.
Please stay safe. Follow the CDC guidelines and know that we are up and running, monitoring your investments and doing our very best to get your portfolio through this extraordinary period.
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