By: Faith Doyle, MBA, CFP ® Financial Advisor Associate at Webb Investment Services, Inc.

The Case for Diversification and staying the course

With all the headlines of the COVID-19 virus in the US and around the world, mixed in with responding global market volatility and upcoming presidential election, it’s easy to get caught up in the ground swell of panic available these days. We wanted to get you some information of how to digest all these headlines from the lens of your asset management and remind you of what helped us to determine your mix in the first place and also give you some context when looking at past recessions.

US Market Reaction: Raymond James Healthcare Analyst Chris Meekins believes volatility will likely be the norm until short-term fears subside. The uncertainty seems to have prompted investors to seek safety in more traditional defensive assets, causing bond yields to fall, explained Chief Investment Officer Larry Adam. Election primaries are underway across the nation as well, but the market seems to be ignoring political headlines for now, added Ed Mills, Washington policy analyst.

China’s effect: China now accounts for a fifth of the world’s economy, more so than when SARS hit in 2003, and recent travel restrictions due to the spread of COVID-19 have spurred a decline in global tourism, according to Chief Economist Scott Brown. We’re also seeing loss of sales for U.S. firms as well as curtailed output in Japan and South Korea.

Bottom line

• The markets can easily distract investors from disciplined investing, but we want to remind all our valued clients that we believe maintaining the appropriate asset allocation is even more important during bouts of volatility.
• The right balance is intended to provide ballast to your portfolio in times of uncertainty and allow you to participate in the eventual rally.
• Valuations are closer to their five-year averages, and market movements, such as the ones we’ve seen in recent weeks, go on to produce positive forward returns more often than not, explains Gibbs.

US Market Reaction, China’s effect, and the Bottom-Line sections are material provided by Raymond James as a resource for its financial advisors. All expressions of opinion in these 3 sections reflect the judgment of Raymond James and are subject to change.

What does this all mean in relationship to your portfolio?

Just months ago, pacing with the S&P sounded like a reasonable goal and one that would provide good returns, but it is a risky proposition and can be very stressful, especially in a volatile period of time for the market, such as what we have been seeing in the last weeks. It’s not typically congruent with the level of risk most investors are willing to take, and can be detrimental to your goals. Remember, risk is a combination of personal feeling for how much is acceptable, what’s appropriate for your time horizon (proximity to your goal), and the amount of assets you have to risk.

To help illustrate this example, see the JP Morgan chart below2. Not that this is our next recession (that remains to be seen and is not being called for by most economist at this time), but let’s rewind to 2008-2009 and see what being balanced versus not would have done to your portfolio. If you were aggressive and had, for example, $100,000 in October of 2007 (the height of the S&P before the Great Recession) fully invested in the S&P, then you could have lost over $50,000 during the crash, leaving you with less than $50,000 on March 9, 2009 (the lowest point of the recession). If you had stayed invested (and that’s a big “if”), it would have taken you until March of 2012 to make up your loss. That’s three years to make back what you lost. Looking at a more diversified approach, a 60% stocks/40% bonds portfolio would have caused you to lose $30,000 and only taken until October of 2010 (19 months) to recover the losses. The most conservative investors; at 40% stocks and 60% bonds would have lost less than $20,000 and only took 8 months to gain back what they had lost in the crash. Point being, being diversified is important in a volatile market and staying invested can lead to a quicker recovery when the market goes back up, but you need to be in an allocation that fits your needs in the first place.

Guide to the Markets – U.S. Data are as of February 29, 2020. Source: J.P. Morgan Asset Management; (Top) Barclays, Bloomberg, FactSet, Standard & Poor’s; (Bottom) Dalbar Inc. Indices used are as follows: REITS: NAREIT Equity REIT Index, EAFE: MSCI EAFE, Oil: WTI Index, Bonds: Bloomberg Barclays U.S. Aggregate Index, Homes: median sale price of existing single-family homes, Gold: USD/troy oz., Inflation: CPI. 60/40: A balanced portfolio with 60% invested in S&P 500 Index and 40% invested in high-quality U.S. fixed income, represented by the Bloomberg Barclays U.S. Aggregate Index. The portfolio is rebalanced annually. Average asset allocation investor return is based on an analysis by Dalbar Inc., which utilizes the net of aggregate mutual fund sales, redemptions and exchanges each month as a measure of investor behavior. Returns are annualized (and total return where applicable) and represent the 20-year period ending 12/31/18 to match Dalbar’s most recent analysis.

When we helped to build your portfolio, we looked at the goals that you had for your long-term plan and made investment recommendations accordingly to help you to build a plan to try and reach your goals while taking the least amount of risk possible. During times of volatility it is important to try and stay the course, particularly if your plan was designed with your goals in mind.

As always, please reach out to us with any questions you may have about recent market events or how to position your long-term financial plan for the months ahead. We look forward to speaking with you. Thank you for your trust in us.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Faith Doyle and not necessarily those of Raymond James.

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate bond market.