The Rationale for Staying Invested

I am reading about the impact of Covid-19 as I push to get all client tax returns completed and filed by the deadline, which may or may not be extended. 

Everyone is concerned and I wanted to respond.

These are scary times, both for personal health for you and your family and for your finances.  We worry about who will get sick, possibly die, and who will be out of work and have major life changes.  

Much of the ultimate outcome depends on how quickly governments respond – “stop everything immediately” contains the infections and thus allows the economy to bounce back sooner, while delayed responses mean many more infections and deaths, with a prolonged, deeper hit to all economies.   

On investing, to those who ask, “should I cash out,” my answer is, “it’s already too late, the markets have already gone down far, and even if you had sold a month ago, knowing when to buy back in is so tricky that you would probably be worse off.”  The truth is, when so many individual investors ask if it is time to sell, that is often a signal to buy. 

Here is an excerpt from a Merrill Lynch research post (credited to Jared Woodard, Derek Harris, Chris Flanagan, Justin Devery and Jordan Young) that I received last week, which crystalizes my experience from the downturns I lived through as well as the downturns I have studied:

Why stay invested?

Not staying invested means missing most of the long-term market upside…it’s simply too difficult to time the market. A strong impulse to hide out in cash is often a sign that a buying moment is near:

• We know that the best days often follow the worst and this has been the sharpest drop into a bear market in history (Chart 3);

• Since 1929, in the 24 months following a bear market, S&P 500 total returns have averaged 20%. Excluding the Great Depression, the average gain was 27% (Chart 4);

• Since 1931, an investor who missed the 10 best days of each decade made 91% in equities. Staying invested meant earning 14,962%;

• In the 2010s, missing the 10 best days meant gaining only 95% instead of 190%;

• Over any 10-year period, the odds of ending with equity losses are just 4%;

Let me know if this helps.  And let me know if you want to talk.   

Again, I hope you and your family stay healthy!

Take care,

Steven

Passive vs. Active Portfolio Management

Choosing whether an active or passive strategy is right for your portfolio is an important and challenging decision and the answer may depend in the areas of the market in which you are investing. In more “efficient” markets, passive is traditionally preferred, but it is believed that active managers are able to outperform in areas like international-small cap stocks.
Morningstar recently took a look at all the mutual funds from its international small/mid-cap categories and found that these categories have many underperforming funds. In a review of Morningstar’s international small-cap growth, value and blend categories, analysts concluded investors would have less than a 50% chance of picking an outperforming fund. As Abby Woodham pointed out in her 6/20/14 article Passive vs. Active: Debating International Small Caps, “The average results are mediocre, but when we look at the list of funds that receive a Morningstar Analyst Rating, actively managed funds begin to look more attractive.”
While the funds on her list have provided significant alpha recently, they can be relatively expensive and their outperformance may waiver. And that leads to the challenge: even if active funds add value, they may not be consistent over time and, if you fail to catch them when this happens, your returns will lag passive funds. If you are concerned that the outperformance will not continue, but you want international small-cap value, an alternative may be a passively managed ETF.