Spring 2020

Spring is here! Notes while looking for the sunshine – May 2020

How Covid-19 is affecting Compass Rose

It feels like it has been six months since we closed the office, banned the postman, and began wearing masks and gloves. Our policy is to allow only one staff member to be in the office per day.  It is total isolation for us, but we feel it was necessary to protect clients, staff, and visitors.

If you have called the office lately, you have quickly been sent to voice mail.  We retrieve those messages remotely every hour.  It is our policy to get back to you immediately so that your needs and questions are addressed quickly.  Please accept our apologies for this process during tough times.

We want to congratulate all of you who have migrated to ZOOM meetings.  It has been virtually seamless, and most clients say it is so easy to use.   For those who have not tried ZOOM yet, we miss you!  We encourage you to schedule a meeting and experience our smiling faces firsthand.  Jim Sambold will continue to reach out to you to schedule a time when your meeting time is coming due.

We may not open our offices for some time.  It seems that Massachusetts is having a serious pandemic problem and it is migrating to New Hampshire.  So, Zoom, Facetime or other web meeting platforms are our only option.  The good news is that we have had great conversations with many clients about their current circumstances, the state of their retirement plan, and the market rebound.  These conversations have been so positive and uplifting for everyone.  And, since your Financial Advisors are lonely, stuck in their makeshift home offices, we want to have more Zoom meetings!  Please call and book a time today!

Managing Portfolios in a Black Swan Crisis

When you have an event that is totally out of the blue, totally unpredictable, and it hits you before you know it, you have what is called a Black Swan event. (Black Swan events are rare, have severe consequences, and are thought to be obvious in hindsight).

Although we did not know it at the time, the novel coronavirus appeared in the United States in December, was recognized in January, and became a very serious problem in February.  By March, large urban centers were under siege and medical facilities became challenged to respond to the sheer number of Covid-19 cases.  There were shortages of personal protective equipment, hospital beds, ventilators and testing kits.  Municipalities, States and the Federal Government scrambled to keep up and the States shut down major parts of our economy to try to stop the spread of the virus.

The public health crisis was then joined by an economic tsunami.  Today, the virus has continued its spread across the country, unemployment has ballooned, social patterns are disrupted, businesses experiencing massive declines in revenues, and bankruptcies climbing.  The global pandemic has spawned a global economic recession more serious than the 2008 Great Recession.

Before we let gloom set in, there is good news to share.  But first, a little history of our efforts to respond to the crisis.  In January, we began taking profits in our actively managed portfolios because we thought that Covid-19 would have a negative impact on the markets.  However, aside from three down days in the market in January, the 2020 market rally roared into February and lasted another three weeks.  We hopped back in to capture new portfolio gains as the market soared to all-time highs.  The stock market peaked on February 19th, and then dropped like a stone by 35.3% in 22 trading days, the fastest and most severe bear market we have ever seen.

In March, we took three important steps in the actively managed portfolios.  First, we sold stocks and raised cash to about 25% on March 11th, when the initial market attempts to rally failed.   Our second step was to sell more positions on March 16th to get to about 55% cash.  Finally, on St. Patricks’ Day, we exited the market completely when we knew the market might falter even more.   After March 17th, the market went on to lose another 11.5%, but we were in relative safety in cash.

It is important to understand that this market collapse was not limited to stocks.  The fixed income markets, including bonds (except for U.S. Treasuries), were hit by massive selling, which, in turn, provoked a liquidity crisis in the fixed income markets.  Things would have been extraordinarily bad for individual investors had the Federal Reserve not stepped in to provide market liquidity and helped the bond market regain stability.  The Federal Reserve also stepped in to help the stock market regain stability at the very same time.  In effect, the Federal Reserve saved the day, and we should acknowledge the pivotal role that the Fed played in averting financial disaster.

So, back to our story!  On St. Patrick’s Day we were convinced that the country would face tough times for an extended period, perhaps up to a year.  We saw crises in health care institutions, businesses going under, families without income, food banks unable to keep up with demand for basic nutrition, federal programs being launched to bolster unemployment insurance, save big business and small business alike, and efforts to help state and local government.  Our country has not seen anything like this since the Great Depression.

Despite our sense of prolonged hard times, the stock and bond markets began an instantaneous march higher.  In 32 trading days the stock market rose 23.7%.  Imagine our surprise, given the state of the country and the world.

We began reinvesting on March 26th, a little late to catch the initial upswing.  By early April, we were almost 50% invested and by April 13th, the portfolios were fully invested.  This cautious approach sacrificed some early gains but ensured that we were protected from another swoon to an even deeper downside.

The last four weeks have resulted in major gains in all portfolios.  The more aggressive portfolios are doing best; since higher-risk, growth stocks are doing far better than the overall market.  But the more conservative portfolios are also demonstrating weekly gains.  Today, all portfolios are sustaining those gains and adding to them.

 Market Outlook – Hazy with a chance of Meatballs

There are significant questions before us.   Will the virus slow down?  Will the virus reemerge in the Fall?  Will there be effective treatments and a vaccine anytime soon?  Will the economy reopen without igniting new hot spots?  Will the economy ever come back to where it was?  Will all who want to work be employed again?  Will we avoid tenant evictions, mortgage foreclosures, boarded up businesses, surges in homeless populations?  And, what about massive Federal deficits?  Will our retirement savings ever recover?  Will we ever feel safe again?

Those are tough, very tough questions.  And, if we are honest with ourselves, no one has credible answers at this point.  All we can say for certain is that America has risen from the ashes before, and we believe that it will again.  The markets are trying to tell us that there is a reasonable chance that social, economic, and normal life is possible sometime soon.  Whether that takes six months, a year or a year and a half, it will come.

We believe a couple of things to be certain:

  • First, our country will experience a horrific number of Covid-19 deaths.
  • Second, our health care workers will continue to be overworked and at risk as coronavirus cases continue to strain resources.
  • Third, we will reopen the economy, but not without additional economic costs.
  • Fourth, there will be new drug discoveries that will moderate the worst effects of the virus.
  • Fifth, there will be a vaccine, or series of vaccines that will prove effective in providing immunity for large segments of the population.
  • Sixth, we will be able to gather with our family, our friends and our communities safely once more.
  • Seventh, we will look back at this time and feel blessed that there were overwhelming numbers of our countrymen who risked everything…to do everything…so that more virus victims could survive and rejoin their families.
  • Eighth, we will feel gratitude to all those that took personal responsibility to follow CDC guidelines on social distancing, sheltering in place, and, yes, to wear a mask in public.
  • Ninth, we will feel especially lucky that we live in the U.S.A. where we can once again take up the challenge to make our lives better, our country better, and perhaps help the world to move forward as well.

There are no guarantees here, but Americans possess ultimate hope, fierce courage and dogged perseverance.  As the rock stars say; we got this!

 Client Survey on the 401k Traffic Light Advisor

Two weeks ago, we asked 35 client households to help us figure out a way to improve our 401k Traffic Light Advisor.  The Advisor is our exclusive program to help clients manage their 401ks/403bs and other employer-based retirement plans for maximum investment returns.  In this program, we work with each client to identify their individual investment choices within their specific retirement plan, provide them with our best advice on those choices, plus advise them on how to allocate their retirement funds within three distinct scenarios.

First, the Red-Light scenario only seeks preservation of cash value (this is where we were in March 2020).  Second, the Yellow Light scenario, seeks moderate investment gains in good, but not great, market conditions.  Third, the Green Light scenario, seeks the highest possible returns in very favorable market conditions given the available investment choices.

Here is what you told us:

  • The vast majority thought that our email message about changing the Traffic Light was extremely or moderately urgent.

CR Response:  Our highest goal is to have the recommended changes treated with great urgency, so it is gratifying to see that the Traffic Light is highly valued by most everyone.

  • A minority made the changes suggested by the Traffic Light immediately (that day). However, the vast majority made the changes in 1 to 3 days.

CR Response:  Ideally, we would like to see the changes made immediately, for best results.  But we are thrilled to see that most implemented the changes within 1 to 3 days.

  • The vast majority reported that it is easy or very easy to implement the changes.

CR Response:  This response was very unexpected.  We hear only about the instances where clients have difficulty with their particular plan’s websites.  So, it is very good news that most clients have a quick and easy way to access their websites and make investment changes without much hassle.

  • It was almost unanimous that the Traffic Light was highly effective in helping to manage your retirement plans.

CR Response:  Wow!  You know we hoped for this.  But it was never clear to us before that clients valued this service in such strong terms.  Thank you!!

Client Comments:

    • One client wanted a follow up call from us after we made a Traffic Light change

CR Response:  We would love to do this.  We commit to doing this when we move to the Red Light.  We will also assess whether we can logistically do this for other changes…great suggestion!

  • One client thought that it was difficult for CR to respond to so many 401ks, with so many choices.

CR Response:  Don’t worry about us.  We consider the Traffic Light to be one of our finest innovations and we know that pre-retirees have most of their assets in a 401k or other retirement plan.  So, they are important! We want to be as effective as possible in helping you manage those assets to boost your retirement prospects.

  • One client wanted to share their log in for the 401k website so that we could implement the changes for them.

CR Response:  There are very difficult compliance and legal issues (not to mention technological hurdles) that make it difficult for us to do this.

  • One client suggested that we provide a heads up if we were even thinking about a Traffic Light change.

CR Response:  We have thought about this!  But we feared that clients would go ahead and make changes when we were just thinking about making a change.  We think it is best to simply issue the change, follow up with a phone call, and then help in any way that we can.

  • One client thought that we were timely in making a change when the market was going up, but too slow when the market was going down.

CR Response:  Yes, guilty as charged!  There is always more time to consider making a change when markets are going up.  It is quite another when markets are declining (since markets tend to go down quicker than they go up).  We need to make judgements on whether we are experiencing a simple market correction (10% to 20% down) or are headed toward a bear market (more than 20% down).  For most market corrections, we will not change the Traffic Light since there is often a quick market recovery.  Therefore, we think that it is best to stay the course for corrections.

For bear markets, it gets tricky.  Bear markets are extremely difficult to predict with accuracy.  And, sometimes (just like in March), a Bear Market occurs very quickly, or even instantaneously.  So, we must be guided by a strong gut feeling, and act on it to change the Traffic Light.  Sometimes, we nail it.  Sometimes it will appear that we are late.  This is not science, it is an art, and we try our best.

  • One client suggested that we add 401k management to our annual meeting agenda.

CR Response:  Of course!  Just let us know that you would like to discuss your external retirement plans and we will add them to the meeting agenda.  We love this suggestion!

Thank you all for your responses.  We will make the changes highlighted above.   And, we are always open to future client suggestions to make this program even better.

What do you do in a Pandemic?  You hire talent!

We are very pleased to announce that we have hired Ryan Oliver as a Financial Advisor Trainee effective June 1st.  We interviewed Ryan last Fall when he was an undergraduate at the Business School at UNH.  We found Ryan to be very bright, focused and hard working.   Of the forty plus students we interviewed, Ryan stood out in his singular desire to be a great Financial Advisor.  He currently serves as a Police Officer in the Town of New Castle and will likely continue in those duties each weekend for the foreseeable future.  We are pleased to have hired a first responder.

Ryan is graduating from UNH, when they have a virtual graduation ceremony later this month.  While it is unfortunate that his class cannot celebrate together, we will help him celebrate.  Please join us in welcoming Ryan to our professional family!