March 23, 2020
Dear Clients and Friends,
After another weekend of COVID-19 news I’m sure we are all on edge as we wait to see what the market has in store for the upcoming week. First and foremost, regardless of my opinion or anyone else’s, no one knows what to expect. This is new. We’ve never seen this before. But what I can say is that I cut my teeth in this business during the 1987 market crash and have been guiding clients since, through the Asian Crisis, junk bond collapse, tech wreck and the 2007 – 2009 Financial Crisis. I’d like to think I have learned a thing or two! Below I’ll outline some of the steps we’ve taken and are prepared to take.
But first, for clients a house keeping note. In keeping with Governor DeWine’s announcement today we will be intermittently working in the office and from home in the coming days. We will not be seeing clients in the office. However, our phones will be forwarded if no one is in the office, and we are well prepared to handle all administrative tasks via email or regular mail. Jim and I will be in constant contact assessing the situation and our investment policies.
It’s All About Strategy
The media would have you believe that the only decision to be made is whether to continue to hold your investments or to sell (and soon I hope, when to buy back in). This is a very simplistic, and in our opinion very harmful for most investors. How one reacts to a market sell off depends on…and no surprise here…on your overall investment strategy. I have preached how important strategy is to the investment process for years, and yet I see very little evidence of it in portfolios we review from outside our practice. A client recently stopped in and asked for advice on his retirement plan. I reviewed what he had and basically said he couldn’t sell it fast enough, even after a very substantial decline. When I looked at the fund’s holdings 8 of its top 10 holdings were in the energy sector, and not the large solid cash flow companies but the smaller debt burdened frackers. I think a couple may end up in bankruptcy. He hesitated as “it did so well last year!” I explained that he did a good job in picking the fund, but failed to develop a strategy, i.e. pick a point to take profits and rotate into something more retirement appropriate. He only implemented 1/2 a strategy!
This is where strategy and timing come into play. We have not sold a majority of our holdings. Why? Because, while no one could predict the COVID-19 breakout, our process identified the energy sector as being financially weak back in February. We sold our energy ETF that we held in some portfolios before the market dropped. We sold financials at the same time. Two of the hardest hit sectors over the last month. We have been focusing what we buy for two years now on high quality high yielding dividend paying stocks. Many companies have increased their dividend payouts for 50 years! These are cash flow rich companies that can weather a downturn. I’m not so anxious to sell quality. We went into this downturn holding quality. Our strategy has been to collect our dividends throughout and and plan ahead for the eventual turn around. We’ll see how we do, but I’m pretty confident in what our accounts will look like in a year from now. We won’t have dividend cutters, we won’t have bankruptcies in our holdings. What we will have will be portfolios full of high quality companies that are back in business as usual mode.
As the crisis has unfolded we have raised a bit of cash in some portfolios. We’ve been short off and on in some, but our big focus is what we do when the market seems to be ready for a rebound. We’ve created two portfolios that we feel can maximize our returns during a recovery without taking on undo risk. We’ll be selling in non-qualified accounts to lock in losses for tax purposes (may as well let the IRS give us a little money back!) and rotating into those “rebound” stocks I mentioned earlier. We’re not just staring at the TV, frozen with indecision as those without an investment strategy are.
What to do Now
Unless you are holding stocks of low quality, high debt companies or junk bonds it’s probably too late to sell now. If you’re not a client feel free to schedule a time to discuss your portfolio, goals and an appropriate strategy for your circumstances.
For clients feel free to call or email with any questions or concerns. We don’t have all the answers but we do have a plan!
And for everybody here is a reason for optimism, an article on possible treatment: https://www.livescience.com/chloroquine-coronavirus-treatment.html
Stay safe.
Bill DeShurko and Jim Kilgore, CFP
