March 19th, 2020

In his latest vlog, David Blain, CEO of BlueSky Wealth Advisors, discusses the potential for market recovery after the coronavirus and the downsides of trying to time the market. Read the full transcript below or click here to watch the video.

“Hello everyone, David Blain here, CEO of BlueSky Wealth Advisors. Just wanted to give you a quick update on what’s happening in the markets as well as talk what’s happening in your portfolio. So first of all, today was another fairly poor day in the markets as the markets continue to decline in reaction to the virus that’s going around, COVID19, there’s a lot of panic. Even today we saw some of the traditional safe havens, treasuries, gold, things like that, decline. Which, once again, is fairly typical in these bear markets at some point people start to capitulate and give in.

While I don’t think we’ve quite seen the bottom yet, there is light at the end of the tunnel. These things do come to an end at some point. We’ve been somewhat spoiled the past decade, since the financial crisis with some good growth, very low unemployment and things like that. I know people with the effect on small and medium businesses the unemployment rate will certainly rise, as well as it’s going to hurt the earnings of the company.

So, no doubt, with businesses shutting down all around the country there is going to be some disruption to the economy for sure. Most people, myself included, looking at the extent of the damage of the virus as well as to the economy are actually not calling for the full year negative earnings, probably, certainly the first quarter and the second quarter, but by the third or fourth quarter, we should be able to resume some sort of growth pattern in global economy.

The Fed, of course, is doing everything they can by employing their monetary policy tools, such as lowering interest rates, purchasing securities in the market, treasuries, things like that. These are some things that they did in 2008 to make sure the financial systems continue to provide liquidity and are functioning as normally. We’ve also seen Congress starting to apply some fiscal policies. So, monetary policies with the Central Bank does play with interest rates and the supply of money is what they’re doing. Fiscal policy is Congress, President, government spending. Either deficit spending, tightening spending, in this particular case, stimulus spending. So, they are pulling some of those out, as well as some tax things that I’ll actually wrap up today’s commentary with talking about what the IRS said.

I got a great question from a client, actually a couple of people have asked about that, they say, “Why don’t, why haven’t you gotten out of the market?” Or they hear about people using stop-loss strategies or getting out of the market, timing the market and these are really good questions, especially the come around about every decade or so when we have one of these massive events.

And so, I just thought I would take a minute or two to explain why we don’t. It’s not because I take great pleasure in just holding on white-knuckled while the markets are going down. I certainly don’t enjoy it any more than anyone does, but,  based on my personal experience—so back in the 90’s, I actually used to do a lot of individual stock,  buying and trading, owned a lot of individual stocks—and so my personal experience in that, as well as the overwhelming majority of research shows that trying to get in or out of the market or a stop-loss strategy when you sell after your investment declines 10%, 15% actually reduces your long term returns. While it can in the short term feel good to get out of it and sit on the sidelines, the reality is, if you’re investing for a longer-term goal, such as retirement or college funding if your children are young, or something that’s more than 3-5 years away, it actually reduces the long term returns.

Why is that? Number one, when do you get back in? That’s always the big question is, just as fast as markets drop they also tend to rebound very quickly and so if you’re sitting on the sidelines,  trying to time it to get back in, it’s very difficult and there’s no system or person that is known to be able to do that reliably over long periods of time.

Yes, you’re going to hear in the coming weeks and months and years about all the people that saw this coming and got out of the market,  and yes, they probably did, but what you don’t hear about is the other five or six times that they got out of the market in the past decade that, that they were wrong. Which is the second reason, so the first reason was it’s hard to tell when to get back in. The second reason is, these types of strategies tend to, what I call, whipsaw your portfolio.

Yes, if you guessed this perfectly right and foresaw this decline and got out and then had perfect foresight when to get in, you look like a genius and it’s great. The reality is, for every one that you get right, you get four or five wrong. The market went down 15% or 16% and so you sold everything and then the next day it went up 7% or 8% and resumed the bull market. And so, it’s those times that you’re wrong on the trading strategy is what reduces the long-term return. It’s not the times that you’re right, it’s all the times that the model is wrong that causes the long-run returns to be lower. And I think it’s important to understand that there are some people that will time the market and they’ll be like, “Oh, I’m out.” But, it’s the times that they do that that they’re wrong that they create the lower return.

The second thing or the third thing is at Blue Sky we use mostly exchange-traded funds or baskets of securities. We own entire markets, we own the entire U.S. Stock Market, not just individual companies, and so sometimes at individual companies, a stop-loss strategy may be a good idea. Individual companies do go bankrupt and you’re going to see some bankruptcies out of this. But the entire market itself, the entire U.S. Stock Market going out of business is an infinitesimally small probability and in fact, if that were to happen, we would not be worrying about our portfolios. You would have anarchy and society would start to break down if that happened. But with the individual stocks, yes, there’s the possibility of bankruptcy for entire markets, such as the U.S.  that possibility does exist, but we would not be worrying about our portfolio if it happened. So, for those reasons, we don’t use market timing or stop-loss strategies.

Number three, I wanted to talk about today was some portfolio adjustments. As I mentioned already, the past decade has been a fairly decent decade for growth. We’ve seen a lot of growth coming out of the great recession, and our portfolios have reflected that. We’ve been on the right side of this market, largely riding the wave up and doing very well—especially last year which went extremely well.

What generally happens though, in a recession, your weaker companies, your smaller companies, they have a hard time actually surviving these type of markets. We’re also seeing Europe and Japan, their economies were already a little bit weaker than the United States and they’re probably going to stay weaker for a while. And so, we have a value bent to ourselves, we like buying things on sale,  we like doing that, we’re a little bit overweight in that arena and so we’re going to take this opportunity to make some of those adjustments.

Also, as you know, we do aggressive tax-loss harvesting, so we’re going to take advantage of that and sell some positions that are down, for the tax advantage. We’ve also been using, the dimensional funds, DFA funds, and almost all those are at a loss right now, as they operate in the value portion of the market. 

Over the next couple of days, couple of weeks, you’re going to see some of these adjustments. As I mentioned already on my first couple of videos, we want to make sure that we’re positioned correctly for when the inevitable rebound happens.  We did that in the fixed income position, already removing, changing out one of them and we’ll start to do some of that in the equity, itself.

While there still may be some declines to come, we’re going to continually make some adjustments to better position your portfolios for the rebound and for what, I think, is going to be a little bit slower economic environment possibly for the near future. I think you’re also going to see some changes in the global supply chain as companies rethink “should we really have all of our medical equipment and all the ingredients for our drugs made in China?”  And the answer’s going to be “no.” And so, you’re going to see this time period of companies that are going to take this opportunity to readjust their supply chains and things like that and so that’s going to lead to a little bit slower growth before re-accelerating again.

The last thing I wanted to mention is the IRS did announce that they are going to make some changes to the tax filing season. As you know, the deadline is April the 15th for individual taxes. So, while they didn’t extend the deadline for filing, they did give a 90-day grace period to actually pay what you owe. If you owe under a million dollars as an individual or 10 million dollars as a corporation, you effectively have a 90-day extension, with no penalties and no interest, to pay your tax bill. You still have to file the actual extension by April 15th, if you’re not going to pay on time, so that’ll extend the filing of the return out to October 15th, but you’ll only have 90 days with which to pay what you owe.

So, our recommendation at this point, is to go ahead, if you’re relatively close to getting it done, we would certainly recommend to go ahead and finish up. Certainly, if you’re owed a refund, the IRS is still processing refunds. I guess the advantage of the government over business owners is that printing presses are still running—it hasn’t impacted the paper supply—so they can still print those refund checks or the electronic deposit to your accounts. And, certainly, if you do have a refund go ahead and let’s get that filed. If you owe money and you have the money, you can certainly take that 90-day grace period to do it, but don’t forget to actually file the extension.

As always, we’ll keep keeping you updated with what’s going on in the markets as well as your portfolios. If you have any questions feel free to reach out to your advisory team or me directly—we’re answering emails, we’re fully functioning. Most of our employees are working at home either because they have children—all the schools are closed, things like that—but we are fully functioning. We have staff who are working throughout the day so please reach out to us if you have any questions or concerns. And above all, I hope that everyone is staying safe and that this has not impacted you or your family directly.”