COVID-19 & Important Investing Reminders
By the Chicago Partners Team
March 18, 2020
Estimated Reading Time: 4 minutes
COVID-19 & Important Investing Reminders
Less than a month ago, portfolios were at all-time highs and the greatest uncertainty in front of us was the upcoming 2020 elections. We were talking about who is going to be the democratic nominee and what type of administration would that nominee try to put together so we could determine what their agenda would look like. A localized virus in China was also happening.
As of February 19th, there were 75,000 cases of COVID-19, with almost all of those cases in China or surrounding areas. To be more specific, February 19th was the day that, for the first time, the number of newly recovered patients exceeded that of new confirmed cases in China. In mainland China, 1,749 new cases were confirmed, while 1,824 patients were newly recovered. A strong positive for China, which marked the beginning of the end of COVID-19 for them, they have now reported a total of 80,880 cases with less than 100 new cases a day in the recent week. What does this mean for the US and other countries? Nobody seems to know, but we can be confident that we will work our way through this and come out on the other side.
As investors in the capital markets, what should you do now? We want to outline some key thoughts that illustrate what we are seeing happening right now:
Permanent Loss of Capital
This happens in one of two ways.
The first way is if an investment’s value goes to zero and we are confident that the global capital markets are not going to go away.
The second way is when an investment is sold at one price (lower) and then purchased at a another price (higher) in the future.
The difference between the higher price that is paid and the lower price that is sold is a permanent loss of capital, which cannot be recovered. It is possible for portfolios to hit new highs after some permanent loss of capital, but it will take longer than a portfolio that has no permanent loss of capital.
Transfer of Wealth
A massive transfer of wealth is happening right now when assets are being sold at prices that do not reflect the long-term potential of those assets. The individual who purchases the investments is essentially taking wealth from the individual who willing to sell at discounted prices.
It is impossible to capture that wealth in the future unless you are able to buy an asset that is worth more than the price you are paying for it. This is particularly painful for long term investors.
Fear Gauge
The CBOE Volatility Index, or VIX, is commonly known as the stock market fear gauge.
Yesterday, the VIX closed at 82.69, which is its highest close ever. The VIX data started in 1990 and was changed slightly in 2004. Since it is now at the highest level ever recorded, it means that we are higher than the Tech Bubble (2000), start of the Iraq War (1991), Aftermath of 9/11 (2001), and the height of the financial crisis (2008-2009). What does that mean from here?
Another measure to gauge the extreme selling we have seen is called the implied equity risk premium (ERP). The equity risk premium is the reward that investors require to compensate for the risk associated with holding equities compared to Treasury bonds. The magnitude of the ERP is critical for investors since it substantiates decisions about asset allocation between stocks and bonds. As of Thursday, the equity risk premium was at its highest rate ever measured – even beyond that measured in 2008. Another data point indicating the extreme nature of this selloff.
Although short-term returns after hitting this rare level are pretty hit or miss, we find that as we move further out in time, returns become more notable, with the average 12 month return +33.3% and higher returns six out of the seven occurrences.
Nobody can predict what is going to happen next. If you start reading headlines, you will see recession, no recession, v-shaped recovery, extended decline, and pretty much every prediction known to financial analysts. The most extreme headlines will be the most prominent because they draw more attention in the form of views and clicks.
So what should long term investors do now? We suggest the following course of action:
• Do your best to remove the emotional aspect of investing. This is true on the down days and the up days. Watching portfolio values drop is very hard to do and it is very easy to convince yourself that the values will never stop dropping. Everyone at Chicago Partners knows this feeling, and we know that it is a very difficult feeling to manage. We also now know the feeling of what it looks like to watch the market rally close to 10% in one day. You can feel great and are convinced that the worst is behind us. This is also dangerous, and we, as investors, need to focus on keeping our emotions in check as much as we can.
• Do everything possible to wait for some stabilization. We don’t know if we are at a bottom or when a bottom will hit, but we also know that it is difficult to rebalance with such extreme volatility. Once we have some stabilization, we will look to do some strategic rebalancing towards long term targets.
• Be prepared to wait for a sizable recovery. While the recovery happens, don’t forget what you are feeling right now. If you feel that the risk profile in your portfolio is higher than you want, we are prepared to address it by making changes to your long-term allocation once we see some recovery in the equity markets.
• Take advantage of the volatility if you can. Some ideas are tax loss harvesting (taxable accounts only) (replacing some legacy assets that have been holding because of gains with others that you like better long term), processing Roth Conversions, or funding and investing other retirement accounts. If you are interested, we are happy to discuss any of these options with you. Another idea is to look at refinancing debt. We mentioned in a previous update that rates were very attractive, but since then, demand has been so high that rates have crept back up. If you have a mortgage broker you know or work with, get them your info now and tell them to keep you posted if an opportunity arises. If you don’t have a mortgage broker that you work with, let us know and we will help as much as we can.
• Remember that the first rule of investing is "Don’t Fight the Fed." The Federal Reserve has taken unprecedented action over the last month, and while we all would have loved to see a huge market rally on Monday after their actions on Sunday, the important thing to remember is that they have essentially announced that they are going to support markets and provide availability to liquidity so that we don’t run into a credit crunch like we did in 2008. The rest of the government (surprisingly, both Republicans and Democrats) have also indicated that they are going to do everything in their power to support the workers and businesses in the U.S. so that everyone in the U.S. can follow the government's guidelines to practice social distancing until the worst of COVID-19 is behind us. While there will be increased volatility, some businesses going bankrupt, and other industries that will never look the same, we are confident that the government is going to do everything in their power to help.
If you have an immediate need for cash, please let us know ASAP so we can take action in the most efficient and responsible way possible. If you don’t have an immediate need for cash, then let's plan for what is next, and be prepared when we have opportunities to continue to move forward. Either way, please let us know if you would like to talk - we are here to walk through all of this with you whenever you are available.
The entire world is focused on COVID-19. Regeneron and Sanofi are both starting trials of experimental treatments. Governments in almost all countries are working on plans to quickly reduce the spread of the virus and central banks are coordinating to help minimize the long-term financial impact of the crisis. One of our favorite African proverbs is “If you want to go fast, go alone. If you want to go far, go together.” We are all together on this and we will go far to find a solution.
All of us at Chicago Partners hope that you and your family are staying safe, and that together, with the rest of America, we will all move past COVID-19 as safely and as quickly as possible.
All the best,
The Chicago Partners Team
Important Disclosure Information
Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Chicago Partners Investment Group LLC (“CP”), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from CP. Please remember to contact CP, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. CP is neither a law firm nor a certified public accounting firm and no portion of the commentary content should be construed as legal or accounting advice. A copy of the CP’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request.
March 18, 2020
Estimated Reading Time: 4 minutes
COVID-19 & Important Investing Reminders
Less than a month ago, portfolios were at all-time highs and the greatest uncertainty in front of us was the upcoming 2020 elections. We were talking about who is going to be the democratic nominee and what type of administration would that nominee try to put together so we could determine what their agenda would look like. A localized virus in China was also happening.
As of February 19th, there were 75,000 cases of COVID-19, with almost all of those cases in China or surrounding areas. To be more specific, February 19th was the day that, for the first time, the number of newly recovered patients exceeded that of new confirmed cases in China. In mainland China, 1,749 new cases were confirmed, while 1,824 patients were newly recovered. A strong positive for China, which marked the beginning of the end of COVID-19 for them, they have now reported a total of 80,880 cases with less than 100 new cases a day in the recent week. What does this mean for the US and other countries? Nobody seems to know, but we can be confident that we will work our way through this and come out on the other side.
As investors in the capital markets, what should you do now? We want to outline some key thoughts that illustrate what we are seeing happening right now:
Permanent Loss of Capital
This happens in one of two ways.
The first way is if an investment’s value goes to zero and we are confident that the global capital markets are not going to go away.
The second way is when an investment is sold at one price (lower) and then purchased at a another price (higher) in the future.
The difference between the higher price that is paid and the lower price that is sold is a permanent loss of capital, which cannot be recovered. It is possible for portfolios to hit new highs after some permanent loss of capital, but it will take longer than a portfolio that has no permanent loss of capital.
Transfer of Wealth
A massive transfer of wealth is happening right now when assets are being sold at prices that do not reflect the long-term potential of those assets. The individual who purchases the investments is essentially taking wealth from the individual who willing to sell at discounted prices.
It is impossible to capture that wealth in the future unless you are able to buy an asset that is worth more than the price you are paying for it. This is particularly painful for long term investors.
Fear Gauge
The CBOE Volatility Index, or VIX, is commonly known as the stock market fear gauge.
Yesterday, the VIX closed at 82.69, which is its highest close ever. The VIX data started in 1990 and was changed slightly in 2004. Since it is now at the highest level ever recorded, it means that we are higher than the Tech Bubble (2000), start of the Iraq War (1991), Aftermath of 9/11 (2001), and the height of the financial crisis (2008-2009). What does that mean from here?
Another measure to gauge the extreme selling we have seen is called the implied equity risk premium (ERP). The equity risk premium is the reward that investors require to compensate for the risk associated with holding equities compared to Treasury bonds. The magnitude of the ERP is critical for investors since it substantiates decisions about asset allocation between stocks and bonds. As of Thursday, the equity risk premium was at its highest rate ever measured – even beyond that measured in 2008. Another data point indicating the extreme nature of this selloff.
Although short-term returns after hitting this rare level are pretty hit or miss, we find that as we move further out in time, returns become more notable, with the average 12 month return +33.3% and higher returns six out of the seven occurrences.
Nobody can predict what is going to happen next. If you start reading headlines, you will see recession, no recession, v-shaped recovery, extended decline, and pretty much every prediction known to financial analysts. The most extreme headlines will be the most prominent because they draw more attention in the form of views and clicks.
So what should long term investors do now? We suggest the following course of action:
• Do your best to remove the emotional aspect of investing. This is true on the down days and the up days. Watching portfolio values drop is very hard to do and it is very easy to convince yourself that the values will never stop dropping. Everyone at Chicago Partners knows this feeling, and we know that it is a very difficult feeling to manage. We also now know the feeling of what it looks like to watch the market rally close to 10% in one day. You can feel great and are convinced that the worst is behind us. This is also dangerous, and we, as investors, need to focus on keeping our emotions in check as much as we can.
• Do everything possible to wait for some stabilization. We don’t know if we are at a bottom or when a bottom will hit, but we also know that it is difficult to rebalance with such extreme volatility. Once we have some stabilization, we will look to do some strategic rebalancing towards long term targets.
• Be prepared to wait for a sizable recovery. While the recovery happens, don’t forget what you are feeling right now. If you feel that the risk profile in your portfolio is higher than you want, we are prepared to address it by making changes to your long-term allocation once we see some recovery in the equity markets.
• Take advantage of the volatility if you can. Some ideas are tax loss harvesting (taxable accounts only) (replacing some legacy assets that have been holding because of gains with others that you like better long term), processing Roth Conversions, or funding and investing other retirement accounts. If you are interested, we are happy to discuss any of these options with you. Another idea is to look at refinancing debt. We mentioned in a previous update that rates were very attractive, but since then, demand has been so high that rates have crept back up. If you have a mortgage broker you know or work with, get them your info now and tell them to keep you posted if an opportunity arises. If you don’t have a mortgage broker that you work with, let us know and we will help as much as we can.
• Remember that the first rule of investing is "Don’t Fight the Fed." The Federal Reserve has taken unprecedented action over the last month, and while we all would have loved to see a huge market rally on Monday after their actions on Sunday, the important thing to remember is that they have essentially announced that they are going to support markets and provide availability to liquidity so that we don’t run into a credit crunch like we did in 2008. The rest of the government (surprisingly, both Republicans and Democrats) have also indicated that they are going to do everything in their power to support the workers and businesses in the U.S. so that everyone in the U.S. can follow the government's guidelines to practice social distancing until the worst of COVID-19 is behind us. While there will be increased volatility, some businesses going bankrupt, and other industries that will never look the same, we are confident that the government is going to do everything in their power to help.
If you have an immediate need for cash, please let us know ASAP so we can take action in the most efficient and responsible way possible. If you don’t have an immediate need for cash, then let's plan for what is next, and be prepared when we have opportunities to continue to move forward. Either way, please let us know if you would like to talk - we are here to walk through all of this with you whenever you are available.
The entire world is focused on COVID-19. Regeneron and Sanofi are both starting trials of experimental treatments. Governments in almost all countries are working on plans to quickly reduce the spread of the virus and central banks are coordinating to help minimize the long-term financial impact of the crisis. One of our favorite African proverbs is “If you want to go fast, go alone. If you want to go far, go together.” We are all together on this and we will go far to find a solution.
All of us at Chicago Partners hope that you and your family are staying safe, and that together, with the rest of America, we will all move past COVID-19 as safely and as quickly as possible.
All the best,
The Chicago Partners Team
Important Disclosure Information
Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Chicago Partners Investment Group LLC (“CP”), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from CP. Please remember to contact CP, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. CP is neither a law firm nor a certified public accounting firm and no portion of the commentary content should be construed as legal or accounting advice. A copy of the CP’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request.