Earlier this week, we emailed our clients to review the lessons learned from the unprecedented market volatility of the past few months.  Figuring that others might appreciate our viewpoint, below is the entirety of that email.

To our clients,

The past few months have been among the most volatile in the history of the stock market. While the story is still far from fully written (both in terms of the pandemic itself and the stock market’s reaction), the experience to date has reinforced valuable lessons.

Over a 33-day span, the S&P 500 fell a whopping 34%, the fastest such decline in U.S. history. It bottomed on March 23rd and then, without any real explanation and certainly without any forewarning, it turned sharply up. The market has since risen an incredible 38%, the fastest such increase in U.S. history, and is now back to a level just below the February market peak.

The most remarkable aspect of the market recovery is that it has done so despite the worst economic data in American history. There has long been a saying that “the market climbs a wall of worry,” but never has that been truer than the past three months. And that’s where the lesson lies.

Many of our clients are management consultants with unique access to corporate leaders and visibility into near-term outlooks for companies and sectors. Other clients are company executives with expertise/visibility into their markets. Some of you reached out in March to say that given your vantage point, the economic damage was going to be worse than the public understood and that you were (understandably) scared; should you sell some stock funds and/or wait to deploy new cash that was otherwise available for long-term investing?

It is worth noting that these clients were right to be concerned about the economy – the unemployment rate and other numbers released in April were sickening, to say nothing of the health news. But anyone who made personal investment decisions based on those predictions has thus far paid dearly as the stock market climbed that wall of worry, and then a few other walls for good measure.

The lesson here is the same as it was during previous crashes, the same that it will be if this pandemic-driven crash has another leg down, and the same for all the future crashes that will inevitably occur over the remainder of our investing lifetimes: no matter how much it feels like “this time is different” or “let’s wait and see,” once you have a well-reasoned investment plan in place (inclusive of thoughtful targets for cash maintained outside the portfolio), the right answer is always to stay the course, regardless of your feelings about the short-term direction of markets or the economy.

The past two months have shown that even if you could forecast the short-term direction and magnitude of changes to key economic metrics (which, despite what the in-house economists at your firms tell you, is difficult or impossible to do reliably), even that rare ability would not predict the short-term direction of the stock market, and you shouldn’t let it inform your personal investment decisions.

The market – and all of our portfolios – are back within shouting distance of their all-time highs. During the market volatility we rebalanced according to plan (selling bonds funds and buying stock funds when the market dropped) and harvested tax losses (selling positions with unrealized losses to offset future income), so when the market eventually makes a new high, whether that is in the near future or not, we will likely have benefited even more than those who bought-and-held without taking any action. But if we can internalize the lessons learned from this crash in advance of the next one, that will be far more valuable.

All the best,
Andrew, Tom, and Patrick