We don't subscribe to any market timing strategy because we don't possess a crystal ball but from time to time it is clearly appropriate for a nudge on the tiller and to trim the sails.....
This is an exact reproduction of an email we sent out to clients on the 24th March 2020.
Before I start talking about "money" I think it bears repeating that this is a global pandemic of historic proportions and the number one priority for every one of us right now should be our health and that of our friends, families and loved ones if indeed they are not all one and the same..
The UK finally announced last night that they are closing down (a week after Ireland) and let's hope not too late to prevent widespread and unnecessary suffering..
I hope that none of you are worried about your finances. You are globally diversified according to prudent investment practices across a wide spread of investments and just like every crises before in modern human history, this too shall pass and life will go on. I am including you in this discussion because like most of our clients you are in a postion to capitalise and literally "buy low"
The challenge and the subject of this communication is how low can this go or said differently, when should I buy?
A word of warning about market timing
I know you know this but it stands repeating, we don't have a crystal ball and none of us knows how this will play out. All we have as a reference is what has happened in the past. As Mark Twain says;"history doesn't repeat itself, but it does rhyme"
For what it's worth, my best guess is that we will see a short-sharp shock to the system lasting several more weeks if not months, followed by a longer more drawn out readjustment to "normality"
Just as we saw in 2008, the key is going to be how the market reacts to the policy actions of Central Banks and Governments. Actions in 2008 like TARP, lowering interest rates, QE etc all served to stabilse the system, and protect the banks from "runs". Still the best explanation of the madness of crowds can be found in the classic It's a wonderful life
The predictions of run away inflation didn't prove correct in 2008 and given where we are with the price of Oil today, are unlikely to be correct this time either.
The central risk, as it was in 2008, is a global recession driven by falling demand leading to deflation and depression.
So, the most relevant period in history for our reference to today is still going to be the 1920s and 1930s to get a sense of just how bad the markets can get before they turn the corner.
This is a graph of the US StockMarket from 1926 to the end of 1945. A boom, followed by the Great Depression followed by World War II. On a scale of 1-10 probably up there with claiming to be an "unprecedented" period in modern human history.
If you had gone through that period you would have averaged a respectable 7.13%pa
Even if you had been unlucky and bought at the very top in September 1929 you would still have averaged 1.86%pa taking in the Great Depression and World War II. To put that into context today that's about 18 years interest from the bank each and every year!
BUT at the bottom of the market your Dollars were turning into Dimes!
What this tells us is that it really doesn't matter WHEN you buy, just THAT you buy AND stay in for the "long-term" resisting the perfectly natural temptation to sell in the face of losses.
In this example, long-term means a couple of decades. Any shorter than that and in my book you aren't investing you are gambling.
Fast forward to the more recent past
This graph shows the performance of Global Developed Equities (in green) and Emerging Market Equities (in Red) since 2001
So the first point to note is that it isn't correct to talk of the Stock market as a single uniform concept.
Global Capital Markets are actually comprised of different asset classes each with their own risk return characteristics as we can see below over the last year
The "market" could be described by the Vanguard Global Stock index fund (developed equities)
Distressed companies (Global Targeted Value) are more risky than the market and therefore have performed worse over the same time period.
Lower risk stocks as measured by their volatility have performed better than the market.
These different sections of the market have performed exactly as we would have expected them to.
So in addition to deciding when to move from cash to stocks, investors also need to consider to what extent they want to "double down" and buy more distressed stocks (think airlines or oil companies) or less risky quality companies (think technology companies)
Finally another consideration is around Socially Responsible Investing and, just as with technology stocks, we have seen investors with a Socially responsible portfolio on average do slightly better than a market portfolio over the last year.
To conclude, I don't think anyone is expecting the onset of the next Great Depression. Global economic activity should restart once the lockdowns are lifted albeit from a lower base line.
Supply chains are disrupted but working. Productive capacity has not been destroyed as in wartime or natural disasters, but is simply lying idle.
Some companies, airlines for example, will need financial assistance and some businesses will fail for sure.
Unemployment globally has increased dramatically but many of these people can be rehired in the future.
I might give it a week or so more, but I don't think now would be a bad time to start to increase exposure to Stocks in general. I certainly wouldn't be jumping in with both feet and borrowing money to boot, but a calm measured approach to dialing up investment risk when looked at over the next 10 years or so would seem to make sense.
Our guide to managing cash deposits in a low interest rate environment which I updated in January of this year and which given subsequent events was very prescient.
The key message is don't invest money you need short term, but long term the real risk is clearly not being invested.
The real cost of this crisis, as I said at the start is human lives and let's hope that is brought quickly under control.
Update a year later
As we can see in the graph below, this approach has worked really well for our clients