Why current sentiment can damage your investment plan

By David B. Armstrong, CFA | Mar 20, 2020 | Weekly Market Commentary

First and foremost, we want all of our clients to know that we fully understand the scope and severity of this financial situation and the impact it has had on portfolios and emotions.  We recognize the challenge of this situation and the entire Monument Team is committed to our clients and their needs over this difficult time.

We will continue to follow our processes – the ones we intentionally created in less stressful times – to minimize the impact of this event while maintaining our focus on the long-term.  We have made an effort to increase our communication frequency and will continue to use the blog as our primary medium to quickly and efficiently communicate our thoughts. We will continue our increased efforts until we have seen some stability in the situation.  We want to make it clear that while we are relying on the blog to get thoughts and information going out as quickly as possible, we are available to you by phone, email and video conference for any reason – we are here to listen, help and advise you on any issue you are concerned about.

This has been the fastest bear market in history – by now you probably know that. This chart from LPL Research breaks it all down.

Ramp Capital did a survey on current sentiment last week.  There were over 3,000 responders.  It’s depicted in the chart below.

Four out of ten people are bullish over the 1 to 3-MONTH time horizon…so less than half.

Seven out of ten are bullish over the 1 to 3-YEAR time horizon. 70%!  Or about 3/4s of the people surveyed!  One to three years!

Almost 8.6 out of ten people are bullish over the 5 to 10-year horizon.

And around 8.5 out of ten people are bullish over the 10 to 20-year horizon.

That’s a survey taken in today’s sentiment – today! I mean, it’s hard to imagine people actually feel bullish today on a time horizon of 12-36 months out from here.

But that’s the point. That’s why falling victim to today’s sentiment is potentially damaging to your plan if you act on it. Most people feel horrible now but still feel good about the future.

Smart.

Like the quote I had in my previous blog, “Few things matter more in investing than understanding your own time horizon and not being persuaded by the price actions caused by people with different time horizons.”

Know your time horizon. Know the probabilities. Know the statistics.

Now, on the topic of losses… Remember, losses hurt twice as much as gains. This is commonly referred to as Loss Aversion.

By the end of 2019, the markets were up 30%.  Common investor reaction to that? “Nice! What are your plans for the holidays?”

Now that markets are down 30% from the highs on February 19th?  “FUUUUUUUUUUUUUUUUDGE!” (But I meant the other F word – sometimes I feel like I can type the real word out, and then sometimes I feel like I can’t…)

It’s because most investors focus on the highest value of their portfolio and look at everything lower than that as a loss.  It’s commonly referred to as Anchoring.

I’m not minimizing the pain nor am I casting aside the seriousness of this sell-off with any sort of casualness, BUT…don’t forget about all the gains you had over the past ten years. They are all still there.

If you didn’t feel destitute in 2018, that’s an emotion to remember now.

This chart will hopefully make my point.

Remember, now is not the time to try to build the portfolio you wish you had in early February…now is the time to ensure you have the portfolio you NEED for an eventual recovery. This chart from LPL Research shows that recoveries can happen very fast. I made some points about this in my previous blog.

Over the short-term, we could go lower, we could go sideways, and we could go up.  No one has that answer BUT what we do have is statistics that show us what happens over the long-term. While not explicitly stated in the chart above, what we know is that time is the most powerful equalizer and markets always recover.

While the storm is dark now, I believe the Coronavirus will be contained within a few months and prove to be a brief setback to the economy.

Again, I believe that the global economy will recover – there is no data to support otherwise. Sure, companies that were not well run, over-levered, or end up needing bailouts may die while companies that were strong in early January 2020 will come back from this event even stronger.

There was NOTHING suggesting we were headed for a recession when this started. It would be a different recovery scenario if all the data was pointing to an economic recession, BUT IT WASN’T.

That’s important.  So is all the stimulus, low interest rates, legislation, low oil prices and low inflation.

We will most likely experience a lot more volatility over the next few weeks…but at the risk of coming off nonchalant, this is the price of investing.  The great equalizer is time.  Continue to use it to your advantage.

Keep looking forward,

Dave

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