In periods of volatility such as the one we are going through right now, it is our goal as your trusted advisors to communicate frequently and provide context and meaningful analysis in what has been an ever-changing news cycle and a very emotion driven market environment.
To that end, we want to do a couple of things in this note:
· Continue to provide context for the market volatility
· Reiterate the realities of owning Stocks for Long-Term Investors
· Describe some of the things we are doing to position portfolios moving forward
Beginning with the Financial Markets, as many of you will have seen the Dow Jones closed down over 2,000 points on Monday; a drawdown of nearly 8% on the day. Taken together, this brings us to roughly 19.3% from the all-time highs we touched a mere 3 weeks ago. (Thomson One).
Adding to fears of the Corona Virus was news over the weekend that Russia and Saudi Arabia could not come to a resolution on oil production leading each to announce increases to production; sending Crude Oil Futures to as low as $31 a barrel. That being said, the Corona Virus fears have roughly reached an outlook of “impending doom” as various areas of the market are pricing in increasingly negative outcomes. While not aiming to discount the lethality of the virus, this is a virus with only 400 active cases in the US at the time of this writing.
Howard Marks, a seasoned and widely followed investor, recently summed investors’ current philosophy as the following:
“For most people, the easy thing is to say that (a) the disease is dangerous, (b) it will have a negative impact on business, (c) it has kicked off a major reaction to date, and (d) we have no way of know how far the decline will go, so (e) we should sell to avoid further {losses}”.
In our opinion, this large progression that markets have worked through over the past 3 weeks provides yet another example of market psychology shifting much faster in both directions that fundamental news and data. Borrowing another quote from a book Marks wrote in 2016 offers a more succinct reiteration of this idea:
“In the real world, things generally fluctuate between ‘pretty good’ and ‘not so hot.’ But in the world of investing, perception often swings from ‘flawless’ to ‘hopeless’ “
Our 2nd goal for this note can be simply summed up in the following sentence
Stocks are Long-Term Assets
You’ve likely heard some variation of this phrase from us dozens of times, but it is of no less importance now. Stocks are not intended for short-term investors, and likewise investors should not use very short periods of time to define their success or failure. Adding on another concept:
In stocks, and in life, somethings are unknown….even unknowable… and that’s okay.
This concept is a feature of the human and investment existence not a bug that can be fixed. Ultimately these two ideas are tightly intertwined and create the foundation on which long-term equity returns are built.
Dividend Growth Investing
The above “realities of Stock Ownership” highlight the potential for strategies such as Dividend Growth Investing which offers investors a much less opaque approach to earning returns in stocks.
In its simplest form, Dividend Growth Investing involves buying the stocks of companies who distribute a portion of their earnings to stockholders in the form of a cash dividend; usually on a quarterly basis. Moreover Dividend Growth Investing targets, through research, companies who have a history of increasing their dividend every year and we believe are likely to continue to do so moving forward.
This form of stock ownership largely simplifies investing into two parts: Current Yield and Annual Change of Dividends.
This is often helpful for both those who are saving for the future and those currently drawing income from their portfolio.
Investors who do not need income may choose to reinvest their dividends (whether it be through a mutual fund, ETF, or Individual Stock) in additional shares; compounding their original investment. For investors taking income, fulfilling income needs through dividends may enable investors to avoid selling shares during a market downturn.
Also importantly, market price and current yield move opposite one another. While it is common for investors to feel that portfolio income moves directly with market prices, the reality is usually quite the opposite.
No strategy is a magic bullet, and no market downturn feels better than the last, nevertheless we remain ever vigilant in optimizing portfolios for risk and return as we see opportunity.
March 2020
**Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. No strategy assures success or protects against loss. Investing involves risk including loss of principal. The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time. **
