By Deron T. McCoy, CFA®, CFP®, CAIA®
Chief Investment Officer
I derive great pleasure not only from being the father of two wonderful kids (ages 9 and 11) but also in having an opportunity to coach or assist with their varied sports teams. Not only is it just plain fun, it offers a front-row seat in helping to mold these young minds and instill core values along the way. Whether it’s during an evening’s homework or afternoon practice, there are so many teachable moments.
In both school or sports, one trait I always try to instill is the value of perseverance and grit. Even though math is hard or the game is tough, we need to urge our kids to never give up – teaching them how to refocus and look for new ways to tackle the task at hand. The goal is to instill a growth mindset: while it might be difficult now, if we persist, work harder and put forth a good effort, we will get better.
But in order to improve, young students and athletes must never be afraid to make mistakes. We all make them. It’s an essential part of the learning process. The trick is to avoid making the same mistakes over and over, or compounding one mistake by making another in trying to correct the first.
These same life lessons can also be sage advice for investors.
Applying youth soccer lessons to portfolio management
After a bad call or bounce, I’ll ask my players, “Can we control the ref? Can we control the field or the weather?” Its music to my ears, the now well-trained eight-year-old boys shout in unison “No!” They’ve learned what they can control—their actions. And they know that those actions will have the greatest effect on the outcome.
Investors must similarly deal with factors beyond their jurisdiction, as they too can neither control the weather, a global pandemic, nor the resulting whipsaws in global capital markets. What can they control? You guessed it – their actions. And just as with youth soccer players, their actions will ultimately determine their outcomes.
Nobody can repeatedly call the exact top in the stock market. If they claim that they have, they’re either named Bernie Madoff or a pathological liar (not that those two are mutually exclusive). WE didn’t call the top either—but then again, we didn’t try. Instead, throughout 2019 we simply urged investors to revisit their financial plan.
In our March 2019 piece titled Late Cycle Toolkit, we suggested that after a 10-year bull run,
“it’s prudent for every investor to assess their situation and adjust their portfolio to prepare for the future.” Adding that not only should investors rebalance but also to “dial down your risk if your investment goals have been achieved.”
A month later in our April’s Insights, we stated:
First and foremost, don’t get trapped into being a forced seller when assets are down 20-40% during the next recession. How? While each investor’s defensive actions will depend on their circumstances, some basic steps everyone should adhere to include:
- reduce or eliminate any margin;
- strive to have 3+ years of living expenses (or cash flow needs) invested in more predictable, stable investments; and
- construct your portfolio in a manner that matches your risk tolerance; meaning don’t own a portfolio that is historically subject to 10% drawdowns every few years (with subsequent rebounds) if you are apt to sell and liquidate after a 10% decline (and missing the rebound).
While the markets remain near all-time highs, start taking profits from the last decade of gains and redeploy that cash into a more conservative account. Why rebalance? Because you’ll need these funds to (re)deploy later in order to turn the fears embedded within the depths of a recession into potentially generating future profits by buying low.
Finally, start training yourself now to possess the needed intestinal fortitude when the time comes. It’s a behavior that runs counter to our human nature. Our ancient ancestors fled from danger in order to survive—and it worked. As modern-day investors, however, we need to approach uncertainty and put money to work as soon as the math dictates.
In short, stick to your financial plan. Or as the Marines in my family would say, “plan your fight, and fight your plan.” With markets up double-digit in three short months, heed the words of President Kennedy and fix your roof while the sun is shining.
Later in October 2019 our newsletter’s article Negative and Less Than Zero stated…
“Recession watch is at its highest level this cycle. And although it certainly doesn’t appear imminent, the heightened probability in quarters ahead is something to bear in mind when reviewing your financial plans for the next 24-36 months.”
And just three months ago in our January 2020 Insights, we added…
“Financial foresight is never 20/20, and this maxim is especially true for 2020. Why was it easier last year (in late 2019)? We suggested rebalancing and buying equities because the ingredients of a Fed Pivot, downbeat sentiment (a contrarian indicator), and cheaper valuations amid a 20% market selloff all suggested strong stock returns in the new year. But this year alas, stands in stark contrast. The Fed is projected to be on the sidelines, and stocks have rallied 30% without a concurrent upward thrust in earnings (resulting in elevated valuations)—so much so that P/E multiples are now at their highs for the cycle; a long way from 2011. In short, the tailwinds have shifted to headwinds suggesting that another portfolio rebalance (sell equities) may be advisable.”
But what if you didn’t get around to taking any action in 2019? What should you do now?
The same mistake twice
As a coach, I certainly can’t get upset if one of our players accidentally reaches out their hand to stop a ball. But if it happens again—it needs to be addressed. We all make mistakes, but we need to learn from those mistakes and refrain from repeating them. So too with investors. When we look at 2020, we need to remind ourselves to not make the same mistake twice. Remember when you sold near the bottom of the 2008 financial crisis? Remember when you were scared and waited until after the smoke cleared to get back in? Remember that when the smoke finally did clear, the stock markets were already 50-100% higher?
If you’re an investor and are looking out three years, my best guess is that a pandemic virus will be in the rear-view mirror. My best guess is that a capitalism-based healthcare system and profit-motivated biopharmaceutical companies will have solved the problem. And that’s the beauty of capitalism and entrepreneurs—they work the problem. This too shall pass. Don’t be left on the sideline when it does.
Compounding mistakes
Let me try to phrase it another way. And again, let’s go to soccer. When my players get beat down the sideline, their instinct is to reach out and grab a jersey to slow the other player down. But that’s a yellow card or a penalty kick, and it only compounds the problem. Similarly, students (and adults) make mistakes but some also compound the problem by lying about it. Most of the time, the second mistake is worse than the first one! The same is true with investing.
If you made a mistake by not taking profits in 2019, don’t compound the mistake by selling now if such a sale is purely motivated by an emotional response to a chaotic market. Instead, perhaps review your plan with your advisor and determine whether a move supports your long-term goals. Don’t let your ‘wanting to do something’ make matters worse. We can turn to great investors for guidance. In the words of Vanguard’s late great John Bogle, “Don’t just do something, stand there!”
Persevere, have grit, and don’t ever give up
Investing is hard on our human psyche. In early human history, one survived by running away from a bear. But oftentimes, investors must do the exact opposite and run towards a bear market. Long-term investors must embrace volatility and not shy away from it. It’s the price we must pay to generate outsized returns.
I know it’s hard. But so is calculus. So is a solo in a recital. So is kicking with your left foot. Now is the time you need to try to be more like your resilient children. We can turn to great coaches for guidance. As best summarized by the late great Jim Valvano, “don’t give up, don’t ever give up.” Remember, your actions today will affect your portfolio tomorrow.
Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss. Past performance is no guarantee of future results. Please note that individual situations can vary. Therefore, the information presented here should only be relied upon when coordinated with individual professional advice. Securities offered through Royal Alliance Associates, Inc. member FINRA/SIPC. Investment advisory services offered through SIA, LLC. SIA, LLC is a subsidiary of SEIA, LLC, 2121 Avenue of the Stars, Suite 1600, Los Angeles, CA 90067, (310) 712-2323, and its investment advisory services are offered independent of Royal Alliance Associates, Inc. Royal Alliance Associates, Inc. is separately owned and other entities and/or marketing names, products or services referenced here are independent of Royal Alliance Associates, Inc.