Special Market Update - From Fear to Faith: How to Maintain Trust in Your Financial Plan

Successful investing starts with having the self-awareness
to realize you can't abandon your plan based on fear.


Fear is the enemy when making decisions during any market downturn. Fear is normal, and understandable, when faced with measurable losses in your retirement accounts that could subsequently affect your life savings. However, fear could result in making a regrettable decision about your investments. Too often, rational decisions don't carry the day in the heat of sell-off. The understandable reaction is to simply say, "I want out."

Having experienced dozens of corrections over the course of our careers, the experts at WT Wealth Management have always counseled investors to make as few decisions as possible until the fear and panic have subsided.

Berkshire Hathaway Inc. vice-chairman, Charlie Munger, has said "Always remember, human nature is the great enemy at market lows. At your absolute climax of fear, you must do the exact opposite of what you want to do.

The Sell-Off, The Bounce-Back, The Consolidation and The Breakout

There are four classic technical events in every dramatic market sell-off. These events are classified as the sell-off, the bounce-back, the consolidation and the breakout. Our most recent experience, from mid-February through the end of May, clearly illustrates these patterns.

During the most recent sell-off event (the red line in the chart below), the market quickly realized that a global pandemic was an authentic reason for aggressive selling. The decline started on Feb. 20th and culminated on March 23rd. When the S&P 500 finished its free-fall, it had dropped 1,149 points (to 2,237 from 3,386), a 34% decline.

The second event is the bounce-back (the green line in the chart below), which is usually a 50% recovery from the peak decline. In this most recent case, that would mean a rise in the S&P 500 index of 575 points (1,149/2) to the 2,790 range. Sure enough, the index hit 2,789 on April 9, just 17 days after the trough. The third event is the consolidation (the yellow band lines in the chart below), where the market trades sideways, awaiting additional information or news events to determine its next move. From April 17th through May 15th the S&P 500 has lost just 9 points while trading from a high of 2,939 to a low of 2,736, a classic consolidation event.

The final event is a breakout from the consolidation pattern (governed by the dotted grey lines) -- either to the downside or upside. This is the least definitive phase as the breakout is more commonly influenced by news and noise, and far less frequently by measurable facts. Bad news can result in a breakout to the downside, perhaps retesting a prior market low, while good news can result in a breakout to the upside, perhaps retesting a prior market high. While this breakout event has not yet produced a clear result, it does appear to be trending towards the upside



What's next?

Clearly, news will dictate the next move in the market. There are dozens of unanswered questions. When will the country re-open and to what degree? How many people displaced from their jobs can return to work? Will industries like airline, hotel, restaurant, cruise and travel recover? Will there be a second wave of the Covid-19 virus? Will we have a vaccine, or cure, and when?

If only to add more uncertainly to an already uncertain picture; we have a Presidential election in November along with 50% of the house members up for re-election and 1/3rd of the Senate.

Markets generally despise the "unanswered questions" that create uncertainty. But we do see some rays of hope. Georgia, one of the early states to emerge from restrictions, hasn't seen a spike in Covid-19 cases like many health experts predicted. Aiding the recovery, the Federal Reserve has delivered the most monetary policy stimulus in its history. There's a long and documented history of monetary policy stimulus working to revive a stumbling economy. The record level of fiscal stimulus passed and funded from Capitol Hill simply adds to the impact of the Fed's actions.

Wrapping Things Up

COVID-19 will be with humanity for the foreseeable future. We will learn how to co-exist with it. However, while the world pursues more testing (both for the virus and for antibodies), improves how we monitor outbreaks, ensures a sufficient supply of equipment, and develops more proven treatments, including a widely available vaccine, the masses will vacillate between fear and euphoria. As we learned in the four phases above, not reacting to the panic and fear (or to the euphoria either, for that matter) and staying the course will remain the best solution for long-term investors.

Like death and taxes, there are two economic certainties from Covid-19. First, a recession, defined by two consecutive quarters where GDP declines, will occur. Secondly, the downturn will end and the economy will normalize, as it always does. Americans are tough, resilient, optimistic, and creative, with a natural inclination to spend.

Fear is greatest when uncertainty reigns, when we are unprepared or when we have no clear plan. In all likelihood, your pre-existing plan is still valid. The biggest mistake is to ignore your plan at the exact moment that you so badly need it and instead make a decision based on fear.

There is no better time to review your personal financial plan with your advisor and verify it incorporates your time horizon, income needs and other assets along with your personal, emotional risk tolerance. Your plan should include an understanding that markets are volatile and clearly identify how to withstand that volatility. Please reach out for help.

"If you fail to plan, you are planning to fail!" Benjamin Franklin


WARRANTIES & DISCLAIMERS

There are no warranties implied.
Any opinions expressed on this website are the opinions of WT Wealth Management and its associates only. Material listed on this website is neither an offer to buy or sell securities nor should it be interpreted as personal financial advice. You should always seek out the advice of a qualified investment professional before deciding to invest. Investing in stocks, bonds, mutual funds and ETF’s carry certain specific risks and part or all of your account value can be lost.

At WT Wealth Management we strongly suggest having a personal financial plan in place before making any investment decisions including understanding your personal risk tolerance and having clearly outlined investment objectives.

View Disclosure
WT Wealth Management is an SEC registered investment adviser, with in excess of $100 million in assets under management (AUM) with offices in Flagstaff, Scottsdale, Sedona and Tucson, AZ along with Jackson Hole, WY and Las Vegas, NV. WT Wealth Management is a manager of Separately Managed Accounts (SMAs). With SMAs, performance can vary widely from investor to investor as each portfolio is individually constructed and managed. Asset allocation weightings are determined based on a wide array of economic and market conditions the day the funds are invested. In an SMA, each investor may own individual Exchange Traded Funds (ETFs), individual equities or mutual funds. As the manager we have the freedom and flexibility to tailor the portfolio to address an individual investor's personal risk tolerance and investment objectives – thus making the account “separate” and distinct from all others we manage. An investment with WT Wealth Management is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. Any opinions expressed are the opinions of WT Wealth Management and its associates only. Information offered is neither an offer to buy or sell securities nor should it be interpreted as personal financial advice. Always seek out the advice of a qualified investment professional before deciding to invest. Investing in stocks, bonds, mutual funds and ETFs carries certain specific risks and part or all of an account's value can be lost. In addition to the normal risks associated with investing, narrowly focused investments, investments in smaller companies, sector and/or thematic ETFs and investments in single countries typically exhibit higher volatility. International, Emerging Market and Frontier Market ETFs, mutual funds and individual securities may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability that other nations experience. Individual bonds, bond mutual funds and bond ETFs will typically decrease in value as interest rates rise. A portion of a municipal bond fund's income may be subject to federal or state income taxes or the alternative minimum tax. Capital gains (short and long-term), if any, are subject to capital gains tax. Diversification and asset allocation may not protect against market risk or investment losses. At WT Wealth Management, we strongly suggest having a personal financial plan in place before making any investment decisions including understanding personal risk tolerance, having clearly outlined investment objectives and a clearly defined investment time horizon. WT Wealth Management may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. Individualized responses to persons that involve either the effecting of transactions in securities, or the rendering of personalized investment advice for compensation, will not be made without registration or exemption. WT Wealth Management's website is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links. Accordingly, the publication of WT Wealth Management's website should not be construed by any consumer and/or prospective client as WT Wealth Management's solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the internet. Any subsequent, direct communication by WT Wealth Management with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. A copy of WT Wealth Management's current written disclosure statement discussing WT Wealth Management's registrations, business operations, services, and fees is available at the SEC's investment adviser public information website (www. adviserinfo.sec.gov) or from WT Wealth Management directly. WT Wealth Management does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to WT Wealth Management's web site or incorporated therein, and takes no responsibility therefor. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.

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