Our clients own some of the best companies in the world - A virus isn't going to wipe them out (even if it's painful in the short run).
This has been a sharp decline and has gained steam as uncertainty has spread. However, just like it has with every other decline and recession, it will pass.
There will be accommodative actions taken by the Federal Government and Federal Reserve to aid in a recovery. This will most likely come in from all directions. When those are announced and enacted, the market will respond with confidence. The swifter they are and bigger they are, the quicker their aid will work its way into the system.
At this point, it’s difficult to know the full impacts COVID-19 will have on corporate earnings as we are seeing the uncertainty play out in the stock market. The value of a stock is based on how confident investors are in a company’s ability to generate future revenue. Uncertainty in their revenue causes confidence to dissipate and their value to decline.
COVID-19 took about 2 months to peak and subside in China, we should expect the same here. Recently Tom Hanks, the actor, tested positive for the virus and here is his calm response: LINK
It’s important to know this is not a credit crisis like 2008. Access to credit and a healthy banking system are the life blood of the economy. You can think of it as the beating heart of the financial system. Whether it’s a small business’ line of credit or the credit worthiness of a large corporation. A company’s access to credit is important. If this spigot turns off, like it was during the 2008-09 Financial Crisis, the system seizes up. Today, the U.S. banking system is healthy, and we shouldn’t expect it to turn off. The banks are not ridden with bad debt and they have several years of liquidity on their balance sheets. This liquidity is an example of a “bumper” that was put in place to make sure our financial system can absorb shocks like we are experiencing today without seizing.
On the flip side, shocks can feed on themselves and become self-fulfilling prophecies. It’s hard to know whether the full impacts are accounted for or if we will see more bad news. In any case, we may be facing a recession as most industries worldwide have been greatly impacted.
Each company we invest in for clients have been selected for their healthy balance sheet, great management decision making and ability to generate multiple streams of revenue (amongst other reasons). This will help them and your account to recover. COVID-19 didn’t change this.
Two important aspects to pay attention to during this time are (1) Cash Flow and (2) Emotions.
Cash Flow – during any economic downturn we need to be extra prepared for client’s cash flow needs. Selling stocks during a declined can impair an account’s ability to recover its value. The best rule of thumb that we share with clients is to not withdraw more than 5% of their value on a yearly basis.
We have worked through this for all of our clients. If you would like a short hand version for yourself, take your account(s) value and multiply by 0.05. The answer is our recommended yearly withdrawal amount. At a 5% withdrawal rate (for the typical balanced account), you should not be withdrawing at a rate that will impair your account in the long run or it's ability to recover from times like this. *Please reference disclosures
Emotions – During this time we can be our own worst enemy. Emotional responses fueled by fear and uncertainty can cause us to abandon sound financial guidance and flee for safer waters.
Any investment in stocks is for their long term contribution to an account, we don’t want to sell while they are down (if that can be avoided). We use high quality bonds to provide for clients cash flow needs. Those bonds will act like a ballast (in a row boat), curbing the volatility and providing cash flow.
We encourage you to speak openly to us as we can be your sounding board and talk through concerns you have.
If you have family or friends that are concerned - if they aren’t being communicated with or if they’d like a second opinion - Please pass along our information as we would like to help them out as well. We know we can help people get through this and to have proper perspective and communication. Communication builds trust and confidence. Just like we have with you, we promise to deliver the same to them.
** We do not take responsibility for decisions made outside of our oversight. We would be happy to speak with you about any investment decision you're considering. The above guidelines are general investment advice, but if you have specific questions please reach out. **