Greetings & Happy Spring.
I want to start off this note by saying THANK YOU. Thank you for not giving up or bailing out over these last two months. Thank you for not letting your emotions get the best of you. Thank you for trusting our dedicated team to do what we do when the markets fall apart. We are here because of you and for you.
Over the last 10 weeks we’ve had a record-setting, unprecedented ride in the financial markets: The sharpest decline ever from all-time highs, record volatility, the best week since 1932, the largest bear market rally ever, & the best month since 1974. That’s a lot. It’s also confusing. To be clear this is not a victory lap. And the worst may not be over. We still need to figure out how to re-open this economy and get back to some level of normal. There has been a lot of damage and it will take time.
Let’s discuss LJI’s investment management philosophy the over last several months. In our core asset allocation accounts, we set long-term targets for exposure to equities. For instance, in our 60/40 Moderate portfolio the long-term target is 60% in stocks and 40% in bonds. In that portfolio we can get as conservative as 40/60 or as aggressive as 80/20. As of January 8th, our 60/40 portfolio was 45/55 as we had sold off 15% in equities. We felt the market was ‘priced to perfection’ and lower prices were ahead. To be clear, it had nothing to do with COVID-19 and we had no idea the market would drop 35% two months later.
Fast forward to March 13th. At this point the S&P500 had fallen 23% from our Jan 8th sale. As the markets fell, we raised exposure to stocks 3 times and that 60/40 portfolio was positioned with 65% in equities and 35% in bonds. In other words, we went from 45% in stocks with the markets at all-time highs to 65% in stock after a 23% pullback. We believe that is prudent. We made very similar moves in our 40/60 Conservative and 80/20 Growth portfolios.
For the record, the S&P500 took another leg down after we made that last purchase and bottomed out 10 days later at -35%. Frankly, with the economy mostly shut down, we assumed a 50% pullback was on the table (like 2000-02 & 2008/09) and we wanted to keep ‘dry powder’.
Fast forward again to last Thursday. Since the March 23rd lows the US stock market has experienced the strongest bear-market rally in history despite horrific economic #s, incredible unemployment and major uncertainty about the immediate future. Barring a mass selloff today, April will end up being the best month since 1974. So, we lowered exposure back to target in our more conservative portfolios and left our more aggressive ones ‘fully’ invested. Again, we feel this is prudent.
We also made a few other major changes during last Thursday’s rebalance. We lowered exposure to international equities. We lowered exposure to the real estate sector. We lowered exposure to lower quality bonds and raised exposure to higher quality bonds. All 3 of those sectors had massive rallies too.
However, maybe the most important move we made last week was a complete restructure of the underlying funds/ETFs we utilize. 20 years ago, the average mutual fund in the industry had an internal annual expense ratio of 1.2%. In other words, back then, a $100k portfolio was being charged $1200 annually (plus growth) by the underlying mutual fund.
We have always used low cost funds and over the last 16 years, the internal annual expenses in our portfolios have steadily declined from 0.52% down to around 0.3%. Our industry has changed a lot over the years, and we are very proud to say, as of last Thursday, those internal annual costs are down to 0.1% annually. That same $100k portfolio at LJI is now only costing $100 annually. This recent change will save our client base over $250,000 annually in expenses. On top of that, all trades are commission-free going forward.
Around here we try to ‘control what we can control’:
- Develop a long-term plan and stick with it
- Have an emergency fund/cash
- Don’t let emotions dictate long-term financial decisions
- Patience matters
- Expect volatility and use it to your advantage
- Costs matter
They say the market takes the stairs up and the elevator down. In other words, bull markets take years and bear markets take months. Since February 19th, this market took the elevator down AND back up. It has been breath-taking and far from normal.
The thing to always keep in mind in the middle of those vicious selloffs is…there are mountains of money waiting to take advantage of low prices. Long-term money. Long-term investors. Institutional money. People who have seen this ‘movie’ countless times over the years. The reasons are seldom similar, but this has happened roughly 8 times in my 26 years in the industry. We’ve lost 50% twice, 35% once and 20%ish 5 other times. Selling into those pullbacks is never smart. Patience pays off. Buyers show up eventually.
Bear market rallies are always the fastest and most powerful rallies. Why? Because you have long-term investors, shorter-term traders, AND short-covering bearish traders ALL buying at once. And emotions run HIGH during selloffs. So, at the very least – in the middle of a vicious cycle – wait for a sharp rally to sell. That makes a lot more sense. In fact, last Thursday we did the same for our more conservative clients.
Hence the THANK YOU. The worst action to take in depths of a bear market is to sell everything and go to cash. But it does happen. It is inevitable to some degree. This time around we had 4 clients who pulled that trigger. 3 of them were under 45 years old. They will all learn from this. The good news is well over 99% of our client base didn’t pull that trigger and participated in the recent rebound. THANK YOU for staying focused on your long-term goals.
I often tell our team our most important role is to keep our clients invested. To stay the course and give clients a chance to fight inflation and reap the rewards that come to long-term, patient investors.
I’ll close with another THANK YOU. That matters too. We’ll get thru this. The ‘What Can Go Right’ note is happening in real time. The initial shock of this pandemic was arguably all about ventilators and hospital capacity. Our way out is all about testing. And then a vaccine. The other side of this will be a new normal. But we’ll get there. In the meantime, we’ll continue to do our best to help navigate the financial markets. Time is our best friend.
Layton L. John & your LJI Team