Now What?

First Quarter Newsletter – 2020

With global stock markets tumbling and an extreme level of uncertainty around the future, human nature is act, to do something, to intercede, to make things better.

See newsletter below for rest of article…

 

 

Main Article

Now What?

Stay calm and do nothing.

With global stock markets tumbling and an extreme level of uncertainty around the future, human nature is act, to do something, to intercede, to make things better.

Yet as a long-term investor, you are often best served by doing nothing different (or very little).

Just let your investment portfolio ride…assuming you were invested in the appropriate portfolio for your life stage and risk tolerance to begin with.

The Market Knows
Although imperfect, the market is generally efficient at pricing in future risk and potential rewards.

Current stock prices reflect the market’s best guess at true value. Asset prices reflect the opinion of all investors with “skin in the game” (i.e., real money at stake); not the opinion of talking heads on TV or online bloggers who may have no financial exposure.

Part of a “stay the course” approach is maintaining on-going contributions to your retirement accounts. For example, if you have been contributing 10% of your earnings to a 401(k) plan with every paycheck, you should continue these contributions.


As a special offer to subscribers, Denny Park Investments—together with RetirementPrep.Org—is offering a free, no-obligation, 30-minute consultation to discuss your individual financial situation. Please click here to schedule.



One Thing
The one thing you should do is take this opportunity to rebalance your portfolio. If you target a 60/40 split between stocks and bonds, your asset allocation has likely shifted away from your target. You likely now hold a larger percentage of bonds and a smaller percentage of stocks than your long-term target allocation.

Rebalancing a portfolio results in selling assets that have recently outperformed (likely bonds) and buying assets that have recently underperformed (such as small-cap stocks and REITs). This returns your portfolio to the target allocation based on your risk tolerance and investment time horizon.

A regular cadence of portfolio rebalancing is a simple way—over time—of systematically buying low and selling high. Ideally you are rebalancing either on a recurring schedule (i.e., annually, semi-annually, or quarterly) or based on a percentage change (i.e., tolerance bands).

Questions to Consider
Where staying the course is often the best approach for long-term investors, it may not be right for everyone.

Consider the following questions when evaluating your individual situation:

  • Has your financial situation changed?
  • Did you lose your job or has your income decreased significantly?
  • Are you reconsidering your target retirement date?
  • Have you experienced other changes in your personal life that altered your overall tolerance for risk?


If the factors that determined your target asset allocation have materially changed—such as the questions above—you may want to reassess your portfolio and align it with your new reality. This could mean switching to more conservative or more aggressive investments.



Bonds Revisited
In the October 2019 newsletter, we addressed whether or not bonds were still a good investment (see ARE BONDS STILL A GOOD BET?).

Let’s quickly revisit what has happened since.

Yields on U.S. government bonds have continued to fall, but other bond yields have remained relatively stable.

Fund 30-day SEC Yield
Sept ‘19 Mar ’20
Vanguard Total Bond Market Index (VBTLX) 2.3% 1.9%
Vanguard Inter-Term Investment-Grade (VFIDX) 2.5% 2.6%
Vanguard Intermediate-Term Treasury (VSIGX) 1.6% 0.7%
PIMCO Int’l Bond Fund (U.S. Dollar-Hedged) (PFORX) 1.5% 1.4%*

As of 9/30/2019 and 3/31/2020; Source: Vanguard and PIMCO websites.
* as of 2/29/2020

Doing their job providing downside protection, Treasury bonds generated positive year-to-date returns, counterbalancing loses from stocks (at least a little).

Unfortunately, corporate bonds suffer from the increased default risk posed by the economic downturn and posted negative returns.

Fund YTD Return
Vanguard Total Bond Market Index 3.3%
Vanguard Inter-Term Investment-Grade (0.5%)
Vanguard Intermediate-Term Treasury 7.1%
PIMCO Int’l Bond Fund (U.S. Dollar-Hedged) I (1.9%)
As of 3/31/2020; Source: Vanguard and PIMCO websites.

 

With Treasury bond yields near all-time lows—and the yield on Treasury bills turning negative briefly last week—it behooves one to start considering if the risk-return offered is still worthwhile. As hard as it is to imagine, it may be time to consider removing Treasuries from your portfolio.

* everyone’s financial situation is different. Please consult with your financial advisor on appropriate investment strategy for your specific financial situation.

 

Quarter in Review

EQUITY INDICIES Q1 RETURN
S&P 500 TR
RUSSELL 2000 TR
MSCI EAFE
MSCI EMERGING MKTS
(20%)
(31%)
(23%)
(24%)

 

BOND INDICIES Q1 RETURN
U.S. AGGREGATE BOND
INT. TERM (3-10 YR) TREA
INT. T INVEST GRADE*
3%
7%
(4%)

 

ALTERNATIVES Q1 RETURN
MSCI US REIT INDEX
OIL (USO)
GOLD (GLD)
(27%)
(65%)
7%

* BloomBarc US 5-10 Year Corp Index

Five Predictions For 2020
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