On Monday, the markets took a historic plunge with the Dow sinking 2,000 points, making the single worst day we’ve seen since 2008. From the worldwide panic surround coronavirus to oil price wars adding fuel to the fire, even interest rate cuts and stimulus activity may do little to help when people are canceling travel plans and not leaving their homes to spend money.
The good news? For the past month, Beacon’s president and founder, Chris Cook, has been speaking with national media about the anticipated specific dangers of the coronavirus on the global markets. For more than a week, our investors have felt relief being removed from the daily volatility and uncertainty since the 2.0 stop-loss was triggered on February 28. And, since the day you invested in Beacon portfolios, they have been designed specifically to handle volatility just like this. They already contain the essential ingredients needed to minimize losses before they become catastrophic.
Consider this your triple-layer defense system within your portfolios:
1) Maximizing diversification through equal sector allocation (protecting against systematic risk)
2) Minimizing losses through stop-loss protections (protecting against unsystematic risk)
3) Maintaining discipline through a mechanical approach (eliminating emotions from investment decisions)
ARE WE ENTERING A BEAR MARKET?
The impact of epidemics on the stock market is not always predictable or even long-lived. However, the fact coronavirus started in China is deeply impacting global supply chains. Added to this, the virus is now spreading across highly-developed countries worldwide and resulting in more significant economic concerns than we have seen in recent history. The only thing that is certain? The markets hate uncertainty. Until this virus is contained and emotion levels out, it is not unlikely this extreme volatility to continue.
So, what is the probability this will be more than an emotional pull back and turn into a full-blown bear market? In looking at the DJIA from 1871 to 2016, once the markets reach a 20% drop from its most recent high, it has resulted in a bear market nearly half of all cases (44%). As of the market close on March 10, the DJIA was just 1% away from reaching this level. Plus, the severity of market losses during bear markets has averaged nearly 40% since 1929 and been even more significant this century.
If you were to ask your clients if they are willing to take about a 50/50 chance of losing potentially 40% or more of their savings, what would they say?
SEEKING SAFETY IN FIXED INCOME
The overwhelming response we have been receiving since the stop-loss was triggered on February 28 has been one of relief. Clients who benefit most from our portfolios are happy to be on the sidelines away from 1000-point plus market swings. They are happy to have a plan that puts emotion and extremes at bay. They are not concerned about missing out on part of a rebound or even a potential home run. What they care about is not blowing up their life savings. And in case that peace-of-mind wasn’t enough, fixed income has and likely will continue to perform better than expected as investors worldwide are seeking respite from volatile equity markets.
Be sure to visit the Advisor Toolbox or contact your wholesaler for additional resources and client-approved materials to help communicate and re-enforce the values our portfolios can provide.