Investing

Understanding the Silicon Valley Bank Failure & Recent Regional Bank Turmoil

Understanding the Silicon Valley Bank Failure & Recent Regional Bank Turmoil

The efforts of the FDIC, Treasury, and Federal Reserve have successfully mitigated contagion risk and a material loss of confidence in the U.S. banking system.  Going forward, it is reasonable for investors to expect more stringent lending standards at the community and regional banks as a result of the failure of Silicon Valley Bank. Tighter lending standards will have the follow-on effect of slower loan growth and in turn, this will negatively impact economic growth.  Despite this, there are several reasons to remain positive.

The Big Three: Time, Diversification, Volatility of Returns

"Doing well with money is not about what you know, it's not about where you went to school or how smart you are, it’s how you behave.” Renowned financial columnist, Morgan Housel, wrote this once and as recent market events have unfolded this statement cannot be more appropriate. There is no doubt that emotions are high as market volatility continues into May but as your advisor it is our job to help manage emotions and see the long term opportunity. As we discussed last week, it is not about timing the market, rather it is time in the market. 

The graph below tells a few stories. 

The first tale is the story of staying invested in the market. Using rolling periods since 1950, a portfolio that is invested in only stocks (green bar) for one year has at best returned 47% and at worst negative 39%. Over 5 years, the best return has been 28% and the worst negative 3% (annualized), and so on. But over a 20 year period the best and worst returns are both positive at 17% and 6% respectively with an average annualized total return of 11.5% over 20 year periods. With more time in the market, the greater the probability of having positive returns. 

On to the story of diversification. Typically, a highly diversified portfolio leads to less volatility. The graph above looks at a conservative portfolio comprised of 50% stocks and 50% bonds. Being invested for one year in a 50/50 portfolio the best return has been 33% (14% less than all stock portfolio) and the worst return has been -15 % (24% higher than the all stock portfolio). Over 10 and 20 years the 50/50 portfolio had only positive results, with an average annualized total return of 9% over 20 years. This is quite similar to the all-stock portfolio but with less volatility over time. 

Almost every year there is an external economic shock and the S&P500 falls. There will always be a reason to sell. Thirteen years ago the market was in free fall when Lehman Brothers, the largest bank since before the Civil War, went under. But, as the chart below illustrates, the market has recovered from the bottom and returned nearly 400% over the next 13 years. 

The downturns are not easy to stomach and can be painful. In times like this it is most important to stick with your investment plan. If you are feeling uneasy and would like to re-asses your plan, please reach out. We are here to provide education, clarity, and reassurance. 

Staying Invested Matters

Volatility is normal.  The graph below shows the largest drawdowns of the S&P 500 for each year compared to the respective calendar year return. Despite these selloffs, the annual return of the market was positive in 31 out of the 41 years. In fact, going back to 1980 the average intra-year decline of the S&P 500 was -14%. 

Last year the largest peak to trough sell-off was -5%, and in 2020 the market experienced a 34% drawdown. Both years ended positive with the S&P 500 up 21% and 16% respectively.  

Do not let it derail your plans. It is extremely difficult to time the market. An investor has to make two correct decisions: when to get out and when to get back in. As the graph below points out, the best trading days often happen within a month after the worst trading days.  Panic selling can lead to missed opportunities on the upside. So next time the market makes you nervous enough to second guess your long-term investment strategy, take a step back and remind yourself that volatility is normal. 

Market corrections and recessions have and will happen. As an investment advisor we strive to provide clients with clarity and perspective so that they can stay invested with confidence.  As always, please contact us today if you have any questions concerning your own portfolio or investment strategy. 

Q3 2020 Recap on the Markets & Economy

Q3 2020 Recap on the Markets & Economy

Stock markets continued their climb out of the depths of the COVID plunge this spring as the 3rd quarter saw stocks (S&P 500) rise 8.9%. After falling 34% from the high of February 19th, stocks have rebounded 51.8% from the March 23rd low to September 30th, resulting in only a 0.5% rise over the whole period (2/19 – 9/30). This puts the year to date gain for the S&P 500 at 5.6%.

Maintaining a Long-Term View Amidst Historic Market Volatility

Maintaining a Long-Term View Amidst Historic Market Volatility

Just three months ago I wrote in our quarterly newsletter:

Bull markets don’t die of old age, rather they die because of some systemic change in the economy which threatens the earnings potential of companies and leads to recession… As we enter the new year, there are many uncertainties and potential risks that could derail the market: the presidential election, a breakdown in trade talks with China, a new trade war with Europe, an earnings slowdown, manufacturing contraction, or consumer spending falters, among other risks. Sometimes a correction just happens because of an event that cannot be foreseen....