11 Sep 2020 Nervy Week, Nervy Q4?
It’s been a nervy week of trading in the stock market! Particularly for tech stocks. The Nasdaq Composite Index (which is heavily weighted toward tech stocks) fell more than 10% in just three trading sessions after closing at its all-time high last Wednesday afternoon. Then on Wednesday of this week, stocks were up big again, with the Vanguard Total Market Index up 2%, followed by yesterday when the market was down 1.6%. On top of the general craziness, there have been a bunch of crazy individual stories, like Tesla’s 21% fall Tuesday simply because it didn’t make it into the S&P 500 (yet), SoftBank revealing it had parked a bunch of its cash into tech stock options, GM buying a sizeable stake in Nikola the electric truck company, etc.
As we anxiously await data on the so-called “Second Wave” of COVID, vaccine progress, fallout from the economic turmoil of the last six months, and the impending presidential election, perhaps the most obvious question for investors is this: Does the heightened volatility of the last week serve as a sign of things to come for the rest of 2020?
Humans are wired to ask these future-oriented questions, but why do we ask them? What is the advantage to us over and above the purely instinctual ways of relating to the world that the rest of the animal kingdom relies upon?
I would argue that the reason we ask these questions is not to obtain answers about the future, but rather to use our musings about the future—our best guesses—to build a framework that gives us the best chance possible to move quickly and prudently in the present.
So I don’t have an answer, per se, to the question posed above. Does the heightened volatility of the last week serve as a sign of things to come for the rest of 2020? I don’t know. My guess is yes, but even then I don’t know what the direction of that volatility will be on balance. I mentioned mostly bad things about the past week up above, but there are also positives related to the vaccine infrastructure we’ve had to build at lightning speed that will aid in future responses to viruses, industries that have seen a resurgence (like guitars!), and simply the fact that markets tend to surprise us on the upside more often than they do on the downside.
Well, if volatility is coming (it almost always is), what should we do today? I’d say the way to go about building a framework for that response would be nearly identical to the way we’d build a framework to deal with the trajectory of COVID.
I think this comparison is a helpful one for investors because the virus has become much more salient to us than the vague idea of “the market” or even our own particular portfolios, and that salience might help drive home some important points. There is so much we don’t know about the virus and about the market. They are both constantly evolving, acting differently in different places at different times with seemingly the same inputs. But of course the inputs aren’t the same, because with both the market and the virus we are dealing with humans, and at a macro level the interaction between humans and institutions and external inputs is impossibly complex.
But there are things we do know about the virus and the market, and things we can make a best guess about for the future, working backward into prudent action today. With that in mind, here are four things we know work for fighting the spread of COVID, and an analogous action for investors in the face of market volatility.
- Wear a mask. Wearing a mask is almost insultingly easy and yet carries a significant upside with zero downside. Investing has a few of these types of actions: Getting out of expensive products and into ones that are basically free (or actually free in some cases). Curbing trading activity. Saving money.These are all remarkably simple, straightforward actions that are going to work no matter what’s happening in the market.
- Wash your hands. The reason hand-washing matters is because we can’t control what sort of germs and viral particles we come into contact with. Washing them is a sort of reset to neutral and reduces the risk of walking out your door and living life. In investing, we call this rebalancing. As an investor there’s no way to keep volatility out of your portfolio. You can’t live in a bubble. So rebalancing back to a risk profile that makes sense for you in the context of a financial plan is a way to deal with that inevitable risk in a healthy way. As we look forward to the last quarter of this insane year, we wouldn’t recommend rebalancing as often as you wash your hands, but certainly to have a pre-defined cadence for when a rebalance is necessary. At Beacon we use tolerance bands to do this for clients.
- Social distance. Social distancing is based on the idea that we can’t control other people’s actions and the effect they might have on our own health, and vice versa. Investors need to focus on the same thing. We have to distance ourselves from other people’s plans, investing habits, and outcomes, because everyone is different. We want different things, value different things, and have highly varying degrees of income and wealth. This distancing is not about being selfish or standoffish, but about being focused.
- Treat it seriously without becoming consumed. It won’t do to treat the virus flippantly, which I hope is obvious by now. But the antidote to that is not becoming consumed by fear and continual existential dread. We must do the best we can to strike a balance, and the same is true for investors. We don’t recommend abandoning your portfolio or pretending its not important, but we also don’t recommend checking on it constantly, allowing it to become a source of anxiety and worry. Trust becomes really important here because ideally an advisor shoulders a significant portion of this burden by filtering out noise and boiling any required action into reasonable steps for the investor.
At Beacon we are constantly looking ahead at opportunities and threats, not so that we can predict what will happen next, but so we can help individuals and families plan for uncertainty with as much flexibility and confidence as possible. 2020 has been awful enough without worrying about the stock market. Let us help reduce that worry.