Your Patience and Perseverance Paid Off.
Updated: Jun 13, 2022
Winter 2021 Newsletter.
Every decade or so, a financial advisor is given the opportunity for the proverbial “teachable moment.” This represents an unplanned opportunity to provide insights/perspectives to clients that will benefit their financial wellbeing for the duration of their lives. Such opportunities do not come along very often but when they do, it is important to seize the moment lest the opportunity be wasted.
With 2020 now behind us, few can argue that it was a year that will stand out in the history books for decades to come. What a year it was!
After a rather normal beginning, the year was marked by a once in a hundred-year health crisis that was accompanied by widespread lockdowns that put the world economy into cardiac arrest and on life support.
Widespread fear occurred on a level unseen in decades. Fear of contracting the COVID-19 virus. Fear of transmitting it. Fear of travelling. Fear of going to work or sending children to school. Fear of going to the grocery store. Fear of getting within 2 metres of family members and lifelong friends. Even fear of touching our mail without letting it sit untouched for weeks. FEAR, FEAR AND MORE FEAR! And oh yes, let’s not forget the fear induced hoarding!
Toilet paper? Really?
The impact of all this fear and uncertainty on the investment markets was as predictable as
the setting sun. As the fear factor and level of uncertainly grew, equity market valuations dropped dramatically as nervous investors ran for cover. In the 34-day period between February 19th and March 23rd, virtually all the world’s equity market indices fell off a cliff. The S&P 500 Index, which tracks the broad-based US market, declined by roughly 34%. Canada’s S&P/TSX Index dropped roughly 37% in the same timeframe.* International equity markets fared little better and, in many cases, much worse. It represented the fastest one third decline in the history of North American capital markets. The response of mainstream media outlets was equally as predictable. Relentlessly biased to reporting all things negative, they bombarded us with a parade of economic “experts” who explained that the next great economic depression was imminent. Thousands of businesses would go bankrupt, unemployment would skyrocket, and anarchy could easily follow. The outlook was bleak.
What was an investor to do in lieu of the dark and scary prognosis? But then, in the midst of the darkness and gloom, something changed. Central banks cut interest rates to the lowest levels on record and inserted liquidity into the financial system by purchasing investment grade bonds (both government and corporate issues). Governments around the world announced massive levels of support for businesses and families to help them survive until the crisis passed. Programs like the Canada Emergency Response Benefit (CERB), the Canada Emergency Commercial Rent Assistance (CERCA), and the Canada Emergency Wage Subsidy (CEWS) were launched (along with many others). Tax filing and tax payment deadlines were extended. Consumers were given the opportunity to defer loan and mortgage payments for months. The level of central bank and government support was unlike anything we have ever seen. Broad based equity indices reacted violently – UP. On March 24th, the S&P 500 increased by 9.4% and the S&P/TSX went up almost 12%.* In one single day! Businesses, consumers and society as a whole started to adapt. Businesses found ways to operate while still protecting their employees and customers. Consumers found alternative ways to purchase the products and services they needed. Health care companies dramatically ramped up production of Personal Protective Equipment so front line health care workers could more safely care for the sick while limiting the spread. Pharmaceutical companies around the world shifted into overdrive in hopes of developing a vaccine that would protect us against the virus. The incredible power of human ingenuity did as it has always done. It rose to the occasion and exerted its mighty influence to solve the problem. No, the crisis is not yet over. Controlling it is still a work-in-progress and we undoubtedly have many difficult weeks and months ahead of us before it is vanquished. But the crisis will end. Such is the incredible power of human ingenuity.
At ClearRock Financial, we responded in exactly the same way we always do. We warned our clients not to react to the grim prognosis that mainstream media was reporting. We encouraged them to stay the course and stick to their financial plan – yes, the same plan that was carefully crafted to reflect their long-term financial goals and not the media headlines du jour. We reassured them and emphasized that ALL crises eventually end (even if we cannot predict exactly when that will happen). We emphasized that nothing captures the wholeness of human ingenuity and human innovation like broad-based equities. We stressed that little more than time and patience was needed for us to move beyond the bleakness. We even did something we had not done in over a decade. In the darkest days of the pandemic and resulting equity market pullback, we pounded the table and implored our clients to send us any cash they were prepared to invest for the long-term. Never let a good crisis go to waste! The prices of great businesses were on sale – time to load up! Our clients were rewarded for their patience and perseverance. Between the March 23rd bottom and December 31st calendar year end, the S&P 500 Index was up 72.35% and the S&P/TSX was up 55.26% (both excluding dividends).*
For many years, we have devoted considerable time toward discussing equity market volatility. Whether during individual client meetings OR in our regular Reflections newsletter, we have worked tirelessly to ensure our clients understood that volatility is simply the short-term tradeoff an investor must make for the superior wealth created by equities over the long-term. The key to long-term wealth creation? Own high-quality equites, hold them for long periods of time and ignore the volatility. It’s a simple concept really. But simple should not be confused with easy. In fact, ignoring volatility can be difficult even under normal circumstances and particularly challenging in the middle of a crisis.
Sometimes normal volatility becomes very abnormal. A global health crisis accompanied by the fastest one-third decline in equity prices in the history of North American capital markets could easily test the resolve of even the most seasoned investor. However, it is during those extremes that our emotions can do considerable and permanent harm to our long-term financial security. Just imagine the poor investor who didn’t have the equanimity to stick to their financial plan and bailed out of equities to the perceived safety of cash during the dark days of March. What did they achieve by letting their emotions dictate their decision making? They managed only to take a temporary paper decline and turn it into a permanent loss. Then, in their fear-induced state of paralysis, they watched helplessly from the sidelines as the inevitable recovery occurred.
This leads to that teachable moment. In the years to come, there will be other crises. The
catalyst that will create each one of them will be different. However, the human reaction will be eerily similar and equity markets will undoubtedly decline (and perhaps dramatically). Some of those crises will disappear like a puff of wind. Others will feel more like a hurricane and will take longer to blow themselves out. But irrespective of their might, temporary they will be and blow themselves out they will. The power of human ingenuity will take care of that. Then the permanent long-term upward trend in equities will resume. Remember your experience of 2020. The lessons learned will serve you VERY well when the next crisis occurs.
And as always, ClearRock Financial will be there to support you. Stay healthy!