Frequently Asked Questions during the Coronavirus Pandemic

March 27, 2020

 

 

The information flow about the current state of our economy, stock prices, health of our citizens and reaction to the Coronavirus pandemic can be overwhelming.

 

So, instead of adding to the onslaught of data, predictions or bad health news, we thought we’d share with you some of the questions we have been fielding from clients and friends.

 

IS THE STOCK MARKET GOING TO ZERO?

 

That’s been our most popular question.  While individual stocks can become worthless, have in the past and will continue to do so in the future, it is almost impossible to imagine all of the companies in the world having no value.

 

Here is the boring analysis.  The value of any company’s stock is set by all of us investors who buy and sell the stock every day. We all are willing to buy or sell based on what we think the present value of all of the future earnings of that company will be, discounted to present value, or today’s price.  The stock market is the accumulation of all of the opinions of all of the investors in all of the companies around the world. So, if all investors think that all of the companies in the world will never turn a profit, then perhaps all stocks would be worthless. This is unlikely to occur in our opinion.

 

ARE MUNICIPAL AND CORPORATE BONDS SAFE?

 

The only bonds deemed to be “safe” in the world are US Government bonds. And there are some who would debate that assertion.  Interest rates on the safest bonds are at historic lows (less than 1% per year for a 10 year bond). In order to generate more interest income, investors like us buy bonds of municipalities and corporations.  Certainly, municipalities and companies can go bankrupt and their bondholders may not recover 100% of their principal.

 

But, we concentrate our holdings in the highest quality municipal bonds used for essential purposes like schools, water/sewer and general obligations of quality states and cities.  On the corporate side we stick with investment grade (high quality) established US companies. Prices of bonds do change, especially in times of stress like now, but we buy and hold to maturity in almost all cases.  We have bought some high-quality bonds in the last two weeks at prices that were extremely attractive compared to recent history. 

 

IS MY CASH SAFE AT SCHWAB?

 

The idle cash in your brokerage account is invested in an FDIC insured bank account at Schwab Bank, with the associated $250,000 insurance. For clients with larger balances, we have been purchasing the Schwab Government Money Market Fund. It is 100% invested in US Government securities.

 

So, yes, it is as safe as we can imagine.

 

WHAT SHOULD WE DO?

 

We have investment policies for all clients. That policy includes not making ad hoc revisions to sound policy.  Times like these tend to make people rethink their tolerance for risk. Now is not the time to change your mind about exposure to stocks versus bonds. The time to consider that is when the heat of the moment passes.

 

We will rebalance portfolios, do some tax swaps that will help out down the road, conserve cash for those who withdraw money periodically for their living expenses, and monitor the economy as we always do.

 

Remember, dealing with uncertainties is one reason equity investors earn a return over time.

 

A well-respected financial columnist, Jonathan Clements, publishes a weekly newsletter called the Humble Dollar. This last week he listed 27 things to do. Check them out here. He quotes several of our favorites: Rebalance, take tax losses, think about what your future self would think of your actions today, control the things you can-costs, taxes and emotions.

 

Jason Zweig of the Wall Street Journal wrote an excellent article ("We'll all look back at this and lie"-3/21/2020 issue) about how we are going to feel in 2030 about what we did now.  His description of hindsight bias is right on target. People reconstruct their recollections built partly on what is happening now and largely from what they learn later about what has yet to happen. So, ignore the forecasts of recovery or doom. Imagine yourself in 10 years saying, "Well, we had another bear market, just like we have about every 10 years.  I'm glad I stayed with my plan because I'm better off now than if I panicked."

 

CAN WE JUST BUY THE STOCKS OF COMPANIES THAT WILL THRIVE IN THESE UNCERTAIN TIMES?

 

Well, those companies may not necessarily be a good buy right now. Their prices might already be higher than they should be and may fall back to earth when the panic subsides.  More profits are made by investors who ignore the uncomfortable feelings they or others may currently have and buy stocks or funds that are currently unpopular. Just ask Warren Buffett or any other value investor.

 

WHY DON’T THEY CLOSE THE STOCK MARKET WITH ALL THIS VOLATILITY?

 

Now that might increase the panic!  Markets work-buyers and sellers may disagree on prices, but they can still buy and sell as they please. Recent innovations like circuit breakers that close the market for 15 minutes in times of stress actually work, and help the markets operate for all of us.

 

We welcome your comments and interaction during this stressful period of history. Our office will be open during normal business hours. Stay safe.

 

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