Perhaps never before have we faced such tumult in such an already uncertain time. For investors, it’s time to stay focused on the future.
What we have witnessed as a country over the last week has been nothing less than shocking and saddening for many. While the buildup to the confirmation of the Electoral College vote was wrought with uncertainty and political threats, we reached a flash point on January 6 that few saw coming. The notion that our Capitol building could be invaded and occupied by an angry crowd would have seemed unthinkable. Perhaps much of this tragedy could have been averted. But regardless of our disillusionment, we are mindful of the loss of life that occurred on Wednesday, and our hearts go out to those affected.
The details of what occurred will be examined and analyzed by the authorities, and individuals who were involved will be dealt with. The rest is less easy to project. What the political and social reaction will be could define the progress of the nation for years.
We at Atlas are in the business of protecting the financial futures of our valued clients. With that in mind, we offer the following perspectives.
It’s easier to identify and hide from the things we might hurt us, than to find and invest in the things that can help us.
As the study of Behavioral Finance has taught, humans are hard wired to avoid pain, and most characteristically flee at signs of danger. We also know that most individual investors feel the pain of loss more strongly than they feel the joy of success. When it comes to investing, these are a combination of challenges that we must work to overcome. In our opinion, the best solution is information. While it’s not the job of many people to stay abreast of what goes on in the capital markets, it may serve you to know that it IS our job, and we take it seriously.
The markets will typically react less to political events than to business events.
As we’ve seen in recent months, trying to trade on news from inside the beltway typically isn’t a productive plan. Leading up to the election, we heard from several clients inquiring about how to “trade the election.” In those conversations, the prevailing concern of individual investors seemed to be that a Biden Presidency and the possibility of a democratic sweep would spell disaster for the markets. Well, as we saw in November, such was not the case. In fact, the markets had a stellar month in November. In anticipation of a vaccine and recovery for the economy in 2021, the S&P 500 was up 10.75% and the S&P SmallCap 600 returned 18.02%1. We think that the political issues currently facing us will be dealt with in time, and the risk of them impacting the markets in a meaningful way is smaller than many might believe.
The economy is not the market, and the market is not the economy.
I don’t know who to attribute this quote to, but I’ve said and heard it said so many times it’s just part of the mindset. Time and time again we have seen this, but perhaps at no time more strikingly than the past year. Dozens of times I heard the question asked “How can the stock market be doing so well when the economy is so bad?” While I could go into governmental/fiscal stimulus and Central Bank policies to explain, suffice it to say that the markets have viewed the virus situation as a temporary issue, and many professional investors have chosen to invest in the eventual economic recovery by buying at low prices rather than waiting for the economy and markets to fully recover. While the markets are often seen as a barometer for economic activity, at their core they are a mechanism for discounting the future profitability of businesses. When the price to own a business with a great future seems cheap, smart investors buy.
The biggest thing we can do as individual investors to reduce risk is to maintain our risk-based asset allocation, and not allow periodic market or economic events to alter our perception of long term risk.
This gets to the idea of market timing. Big events happen from time to time. All too often, individual investors look to maximize returns by buying and selling in reaction to news. While on the face of it this may seem reasonable, research has repeatedly shown that it typically does not work, especially for individual investors. In fact, after the 2007-2008 financial crisis, many individual investors failed to return to the markets in time to recoup losses as the markets recovered to their earlier levels. That event caused many investors to sell out, thereby locking in losses from which they have never recovered. Since then, market timing has become regarded by many in the financial planning industry as one of the biggest factors leading to failure to reach financial goals.
I recall early in my career seeing a particular investment guide written for individual investors. Some of you may also have seen it. In it, the author described what he thought was the formula for many to find investment success. It was something of a Rip Van Winkle approach. The idea was to buy high quality companies, and hold them for a very long time. When we buy funds or stocks for our portfolios, our theoretical holding period is “forever.” Until something changes with the company or its strategy, we’re in. In times of political tumult, we think a similar frame of reference is productive for our valued clients. Determine an appropriate risk based allocation with your advisor, and stay committed.
Please feel free to contact your Atlas Wealth Management Advisor if you have any questions about this or any other financial matter. As always, we are always available to serve you.
With Best regards,
John C. Ogle
Chief Investment Officer
1 https://www.spglobal.com, Jan 05, 2021, U.S. Equities Market Attributes December 2020