Covid-19, The Markets and Your Portfolio
Updated: May 25
Your frequently asked questions, answered by our Investment team
In light of Covid-19, we wanted to share an overview of the markets and answers to the most frequently asked questions (FAQs) our investment team received in the past few weeks.
We are not going to sugarcoat it and will be upfront. This was a challenging quarter, and we understand you may have concerns. If you review your latest quarterly statements, you’ll notice that the value of your investments may have declined. We hope that the answers below will explain your investments in context of the current situation, and help alleviate some of your concerns. It is critical to point out that any declines in your account are temporary, markets will prove to be resilient, and your plan at Open Access is still on track towards reaching your financial goals.
1) What happened to my portfolio in the first quarter of 2020?
We rang in January with cautious optimism. Global markets were coming off a banner year, but views were tempered by lofty market valuations. Overvalued markets can defy gravity for some time and it takes a catalyst to spark a correction. The spark came in strong and in two forms: The first was the spread of COVID-19 around the world and the second was a breakdown in coordination between global oil-producing countries. As a result, February saw the end of an eleven-year bull market. And, it was a decisive end, with stock markets registering the fastest 30% decline in history.
Overall, our strategic diversification did its job. A lower risk profile ensured that our investment account has been able to side-step the ‘lowest of lows’ in the first quarter of 2020.
Your portfolio at Open Access did not escape the first quarter completely unscathed. However, with our strategic and cautious moves, your portfolio also did not bear the full brunt of the downturn. While your stock funds fell, the cash and bond strategies in your portfolio registered steady gains. You’ll be happy to hear that, following the negative impact of Covid-19 in March, April was a much better month for your Open Access portfolio.
2) What has been Open Access’ response?
Our investment team spends a lot of time on diversification. In particular, we determine the best strategic mix of cash, stocks and bonds that is appropriate to help you reach your financial goals.
We moved to a defensive position:
In addition to ensuring that your savings are properly diversified, we also actively manage your plan. For example, your long-term strategy may call for your savings to be invested 60% in global stocks and 40% in bonds. In the short run, however, our team may determine that a mix of 54% in global stocks and 46% in bonds is best to maximize the current reward-to-risk tradeoff.
As economic and market indicators deteriorated significantly in February, the investment team shifted your account to a defensive position. This entailed decreasing your exposure to global stock strategies and increasing your investments to steadier cash and bond funds. These actions helped soften the blow of what was ultimately a very turbulent March for markets.
We crafted a roadmap for the months ahead:
Our investment team also crafted a roadmap for the months ahead. We are humble enough to realize that any market forecasts are likely to be wrong, given the huge amount of uncertainty about what comes next. That said, our roadmap consists of a series of checklists. These checklists contain key levels of various market and economic indicators that will guide us in making additional shifts to your portfolio mix.
So far, while some of our market indicators are turning positive, the economic readings continue to come in extremely weak. Your portfolio remains defensively positioned as a result.
3) Will this impact my financial goals?
History shows us that the key time horizon to focus on during volatile markets is about two years.
During the global financial crisis of 2008-2009, which was the last significant downturn in the markets, global stocks fell nearly 50% (for context, the largest top-to-bottom decline stocks have experienced thus far in 2020 is a little more than 30%). Even in what was a generational downturn and one not seen in nearly a century, an investor with a balanced mix of stocks and bonds was back to even within two years.
This two-year window is also supported by the fact that, since World War II, US Stocks were back to their highs, on average, within two years of hitting the bottom of bear markets.
We don’t believe that we are out of the woods yet. The current downturn is still playing out.
The Long Term View
Yet, you can take some comfort in the fact that markets have time and time again proven to be resilient. With a long-term view on your retirement portfolio, the latest downturn hasn’t changed your big picture. You remain on a good track to reaching your financial goals.
While that is the good news, the caveat is that reaching these goals requires that you stick to your investment plan. We don’t say this because it is good for Open Access. We say this because staying invested is the way you’re going to come out of this temporary downturn stronger. Revisiting our experiences during the 2008-2009 downturn, investors that stayed on plan ultimately came out with portfolios 30, 40, 50% larger than those that threw in the towel.
We can’t control the markets, but we can control how we react to them.
Source: Bloomberg | OAL
What to do during turbulent times?
During volatile times, refocus on the purpose of participating in your Group Plan. Ask yourself, would you be selling out of your current strategy now because you need to, or because you want to?
Consider two choices from the last significant downturn. In both cases, you start with $100,000 in 2007. These savings are invested in a diversified portfolio of 60% stocks and 40% secure fixed income. By the end of 2008, you're down more than $15,000.
At this point, you either stick with the long-term strategy (the red line) or move everything to cash until the markets and global economy are on better footing (the blue line). In this case, we assume you take another year before deciding the coast is clear. While the "conservative" approach seems reasonable in the short run, it costs you thousands of dollars over the next 3, 5 and 10+ years.
As difficult as it is, look across the valley to what is on the other side of this downturn: recovery. Stay invested, make more money.
4) Should I be more conservative with my investments?
This is the top question posed to our investment team today. To put it simply, no. We do not believe that this is the time to sell stocks in favour of bonds and cash. Don’t get us wrong. Our view is that we are likely to see more volatility in the months ahead. So, moving slightly more defensive to absorb some of these shocks makes sense. As noted, this is what our investment team did in February.
If you are an individual with a 2-3 year time horizon (for example, using your Open Access plan to purchase a home in the coming years, or are on the cusp of retirement), then playing more defence in your account is a sound strategy.
We advise against moving from a balanced portfolio to cash, simply because the markets went down.
Refocus on your financial goals
We completely understand the temptation to do this. Open Access employees are invested alongside you in the same funds, and we feel those temporary declines in account values just like you. That said, it is important to refocus on the purpose of saving and investing in your plan. It is about growing your savings at a decent rate over time, in order to reach your financial goals.
Making wholesale moves into conservative investments is another way of saying that you favour cash and bonds. With interest rates where they are today, these investments will be lucky to generate any returns above inflation in the next part of the cycle. For example, buying a “safe” 10-year Government of Canada Bond today locks in a return of just 0.6%.
A 0.6% annual return over the next decade does not seem like a “safe” way of growing your savings enough to reach your goals.
At the other end of the extreme, you have stock investments. Which, as we have seen, are not perfect either. Although, they offer investors with a reasonable time horizon the potential for far better returns. Just take April, where stocks posted their best monthly return in three decades with a rebound of more than 10%.
Diversify your investments
The reasonable approach to this is also the simplest: diversify your investments. Hold some bonds and cash strategies for short-term safety, while investing in stock funds to achieve the growth required to reach your goals. This is exactly how your portfolio at Open Access is currently constructed.
5) So, what should I be doing?
The best thing for you to do right now is to remain invested in your plan and focused on your long-term goals. We recommend that you update your Investor Profile. This helps the Open Access team ensure that you are in the strategy best-suited for your goals.
The Investor Profile determines your time horizon, which, as described above, is critical to understanding the mix of safety and growth strategies in your account.
This Investor Profile also asks some questions to understand your tolerance for volatility. When it comes to these questions, keep in mind the true cost of moving to safe investments. Remember that the decision to endure higher short-term volatility is rewarded with better long-term returns. Another way of looking at this is to think about may be another large investment – your house. While many factors, such as changes in interest rates, the job market and the economy, can influence the value of your house, the majority of us don’t track the day-to-day changes even though it has a material effect on our net worth.
Thinking about your investments
And, even if you are tracking the changes, how likely are you to sell your home if the value dropped in the last few months? The value will recover, and you’ll continue to build home equity over time.
Think about your investment account the same way. In today’s markets, long-term views are not intuitive, and not necessarily comfortable. But it is the path to growing your net worth sustainably in the long run, just as it is with your house.
6) Where are stock markets headed?
While it is not reflected on your latest statement, you’ll be happy to hear that, following the woes of March, April was a much better month for your Open Access portfolio.
This naturally leads to the question of where we go from here. Is this rebound in global stocks sustainable?
With the usual forewarnings about the usefulness of short-term market forecasts, we would say that it is unlikely that we are out of the woods yet. The volatility experienced so far in 2020 is expected to be with us in the months ahead.
Stock markets are reacting to the tentative easing of COVID-19 lockdown restrictions around the world, the massive amounts of stimulus pumped into the system by major countries and central banks, and relatively cheap valuations. There are similarities between recent times and the experience of the outbreak of SARS in 2003. The stock market bottomed the exact day that the number of global cases of SARS peaked.
What 2008 tells us about 2020
With that in mind, our investment team believes that the 2008-2009 example is instructive. The steepest declines occurred in September 2008, and the markets experienced a relief rally into January 2009. These gains proved fleeting. The market did not hit its ultimate low point until March 2009. The further declines in February 2009 stemmed from fresh economic readings and company earnings reports detailing just how severe the damage was.
We are heartened to see that governments and central banks responded early and aggressively to this latest economic downturn. However, our view is that the true impact of the lockdown restrictions have not been fully reflected yet in stock prices.
Looking out to longer-term, we continue to favour stocks over cash and bonds. While inflation rates, economic growth and interest rates are likely to stay lower for longer, it is difficult to see much upside in “safe” investments.
7) What do I do if I have further questions?
Some of the heartening aspects of these challenging times are the stories of communities, businesses and countries coming together in support.
Our team at Open Access is doing its part. We’re here to support you in navigating these markets and ultimately reaching your financial goals. If you have any questions about your account with us, our client service team is here to help.
Our team is available by phone at 1-866-625-4777 or email at firstname.lastname@example.org