Earlier this month (on March 2nd), we emailed our clients to discuss the onset of the recent stock market decline.  Figuring that others might appreciate our viewpoint, below is the entirety of that email.

To our clients,

With the Coronavirus dominating the news and the stock market falling by more than 10% last week, we wanted to share our thoughts and reinforce the investment philosophy that serves us so well during times like these.

We of course have no predictions about the virus itself and are only qualified to discuss the implications of the market decline it has triggered.  While our investment recommendation is (as always) to ignore it and stay the course, the same does not apply to the health risks – keep washing those hands!

Regardless of whether the decline is over or just starting – and please ignore anyone who suggests they know which it is – if you are reading this email you should take comfort knowing that you have prepared either way.

Because we know that markets will crash multiple times over our investing lifetimes – but because nobody knows when – we prepare in advance.  (Note: on average, the stock market experiences a 10%+ correction once per year, so aside from the speed of this decline, we are still in very standard territory.)  Each of you has the appropriate amount set aside in checking/savings accounts for all of your short-term needs, so market declines should have no effect on your ability to meet near-term obligations.  Each of your portfolios has an allocation to stocks no greater than what we collaboratively determined would allow you to still sleep soundly even during a market decline of 50% or more. We know these are coming, and we plan for them.

While the declines themselves are always unpleasant in the moment, there are some positives:

First, for those of us whose human capital (i.e., the present value of our future earnings) is still larger than our financial capital, we should welcome these market declines, as our future stock positions (which, even if invisible, still greatly outweigh our current positions) will presumably be purchased at lower prices.

Second, because we have well-defined rebalancing rules that prompt Geometric to rebalance your portfolio whenever an asset class drifts out of its defined tolerance range, volatility creates the potential for a “rebalancing bonus” (via either increased returns, decreased risk, or both).  Indeed, our portfolio management system is continuously monitoring your portfolios for these rebalancing opportunities.

Lastly, market declines provide us with the opportunity to “tax loss harvest” any positions (or even specific shares within a given position) that suddenly have an unrealized loss.  This means that we will sell the shares to realize the loss, replace them with a similar-but-not-identical mutual fund or ETF for the required 31 days (as prescribed by IRS regulation), and then re-purchase the original mutual fund or ETF.  The realized loss can be used to offset certain taxable income. Our system is continuously monitoring for these as well – you have likely already received trade notification emails from TD as the result of our loss harvesting trades.

So with apologies for continually sending the same message in these emails, hopefully it’s a helpful one: you prepared for this, we are reacting as planned, and you have the luxury of ignoring the investment implications of any scary headlines.

All the best,
Andrew, Tom, and Patrick