Investment

It’s A Fool’s Errand

Markets-Black-Swan-Reference

|During the last financial crisis, a manager at UBS commented that every investor should have a “SWAN” account—for “sleep well at night.”|

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It’s a fool’s errand to try and explain daily gyrations in equity markets. The ride since the S&P 500 hit an all-time high just a few weeks ago has been dramatic, and any further declines should surprise no one.

“How many things were articles of faith to us yesterday, which are fables to us today?”  Montaigne

Moving past more jawboning about the totally unprecedented shutdown of economic activity, the way forward is far from clear. The U.S. economy has been put into a forced coma in an effort to prevent further deterioration (which is not to make light of the terrible physical and emotional toll we see growing around us every day – it is simply a fact that I discuss investments here, not medicine – this analogy notwithstanding). It’s not certain that the government will be reviving its patient anytime soon. And it is possible that the restart will take far longer to achieve than we can imagine.

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I suppose we could be generous and suggest that the government has thrown a financial bone (a few trillion dollars) to small businesses and their now unemployed minions. And despite some seeming confusion, it looks like the banks and really big businesses stand to make out pretty good too, again. Yet by implying (promises don’t exist in the House, Senate or Oval Office) that the Fed “will do whatever it takes” for the next couple of months we are being warned the worst may yet be to come. 

So how do we save and invest now? Wall Street-ers will tell you that this, too, shall pass. Probably, maybe, or maybe not. Better to wait until the fog clears, or start buying equities now because the first bounce off of the bottom is where most of the gains will come as markets recover? Personally, I’m making assumptions that have led me to use this last updraft to sell some ETFs and build cash for when the time comes to get serious about buying again. I’ll be on the sidelines for a while yet.

“Don’t trust a brilliant idea unless it survives the hangover.” Jimmy Breslin

Two examples are shared here:

First, my enthusiasm for emerging markets has completely evaporated.

Considering the impact of COVID-19 on the United States and our uneven responses, the idea that countries like India (three times the size of the U.S. population with a fraction of the medical infrastructure) will not see economic chaos is unthinkable. The Pacific Rim (and even Russia) haven’t begun to be hurt like the U.S. but almost certainly will. My bet is that supply chains get shorter as the world acts more local than global. After a couple of decades, I’m finally eliminating this asset class from my portfolios. When the time is right, the proceeds will be reinvested into non-U.S. blue-chip companies.

Second, publicly-traded REITs and real estate tied to equity markets will likely struggle mightily over the medium term.

Known for their great yields and high payouts (in the case of Real Estate Investment Trusts, required by law to distribute the majority of earnings to shareholders) it will be tough to pay dividends when companies and people don’t have to pay rent. How many restaurants, nail and hair salons or tattoo parlors will still be needing retail space six months from now? And what are the long-term ramifications of businesses learning that much of what needs to happen to ensure happy customers does not have to happen in centralized locations? Physical real estate makes up the largest part of my investable assets (all of which I’ll note are debt-free) so it no longer makes sense to have real estate exposure through equity markets. These funds will be reinvested in my S&P 500 ETF.

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Yet the most important takeaway might just be that cash is still king and liquidity matters more than ever. The focus today isn’t about making money, but preserving it. You don’t want to be forced into making decisions about your equity investments because one or another financial obligations have come due.

During the last financial crisis, a manager at UBS commented that every investor should have a “SWAN” account—for “sleep well at night.” Agreed.

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