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Keep Calm and Carry On

I’ve had a lot of worries in my life, most of which never happened.” — Mark Twain

For investment managers and advisers with skin in the game, the ups and downs of financial markets have a predictable way of making us humble. If you ever encounter a financial professional reeking of confidence, I’d advise in most instances, that you run the other way. From my experience, over-confidence in the financial services industry usually signifies one of two things – either that person is selling something you probably don’t need, or alternatively, that person lacks experience and doesn’t possess the inevitable scars of wisdom that come with the territory.

In last month’s newsletter, I asked the (rather humbling) rhetorical question, what catalyst could cause markets to sustain a decline of 20% or more? I was and I still am constructive on the stock market and therefore didn’t take into account Black Swans such as the COVID-19 virus or an OPEC price war between mega oil producers Saudi Arabia and Russia raining on the parade. Nevertheless, the bottom line is this - sh*t happens and we as investors should be prepared since no one can predict what the future will bring.

The best way long term investors can protect themselves from large permanent loses is through thoughtful diversification. Most people cannot handle the variability of a 100% equity portfolio on their wealth and alternatively will also not be rewarded (considering inflation) by holding 100% of their assets in cash. Therefore, as with many things in life, the optimal mix lies somewhere in between and largely depends on the individual. Over time, prudent investors are rewarded for staying invested in markets during the inevitable rough patches as the next rally could be right around the corner. Of course, there is no consistent way to predict when this will happen, therefore the investor who grows their wealth the most is usually determined by their time in the market.

Consistent with the theme of managing oneself, I am passing along the below article posted on industry website, written by Scott MacKillop, who is the CEO of First Ascent Asset management. We have met the enemy and he is us.


Wisdom to Share with Clients When the Going Gets Tough

Despite market volatility, do not abandon an otherwise sound investment strategy.

By Scott MacKillop | Mar 04, 2020

CEO First Ascent Asset Management

Most people are surprised to find that they hold the key to their own investment success. But it’s true. An investor’s behavior is the most important factor in determining success.

Here’s why. You can be invested in the most perfect portfolio, but if you abandon the strategy before it has a chance to work for you, you won’t be a successful investor.

Most people abandon their strategy for one of two reasons. Either they lose heart because of declines or volatility in the market, or they become fearful based on world events.

Neither of these reasons justifies abandoning an otherwise sound investment strategy.

Be Strong in the Face of Market Declines

Over time, the stock market goes up. As you can see, the road is bumpy, but the long-term trend is distinctively upward. From 1950 through 2019 the stock market rose on 53.7% of the trading days. On average, it rises a little more on up days than it declines on down days.

This pattern is not random or accidental. There’s a reason for it. The market is ultimately driven by increases in the earnings of the stocks traded on the market. If earnings continue to increase, the market will continue its upward trend.

But will earnings continue to rise? Over time it is highly likely that they will because earnings increases are driven primarily by human behavior that is hardwired into our being.

Maslow’s famous “hierarchy of needs” tells us that people are driven by the desire for survival, security, love, status and self-actualization. In other words, people strive to improve their lot, provide for their families, gain approval and recognition and become the best they can be.

These forces are expressed through hard work and creativity. When individuals band together in collective efforts, these forces can be amplified. In a commercial context, they produce growth, increases in productivity, and innovations—the drivers of increased earnings.

Our global community is comprised of 7.8 billion people striving to improve their personal situations and the lives of those they care for. If they have the freedom and incentives to do so, they will continue to find ways to create value through their labor. Neither bear markets, nor discouraging headlines will deter them. In fact, adversity may accelerate their efforts. Necessity is the mother of invention.

Bear markets are unpleasant, at best, and can be downright scary. But they are temporary conditions that pale in comparison to the power of bull markets.

Since 1926, there have been 11 bear markets and 12 bull markets. The average bear market lasted just 1.3 years, while the average bull market lasted 6.6 years. Average losses from bear markets were a cumulative -38%. Average gains from bull markets were +339%.

It would be nice if it were possible to benefit from the bull markets and avoid the unpleasantness of the bear markets, but, alas, it is not. Securities markets are complex adaptive systems that are driven by many variables. It is impossible to account for all of them.

There are no academic papers or rigorous examinations of market timing systems that support the consistent success of that approach to investing. Many demonstrate its shortcomings.

As legendary investor, Warren Buffett put it: “…the only value of stock forecasters is to make fortune tellers look good.”

The only reasonable alternative is to remain invested through the difficult times. This requires strength and resolve. But cultivating this capability is essential for investment success.

Don’t Invest Based on the Headlines

The other reason that causes investors to abandon their investment strategy is fear driven by world events. Like abandoning a strategy because of market declines, this is a bad idea.

As you can see below, despite wars, natural disasters, financial crises, terrorist attacks, trade wars, pandemics and a host of other negative news a dollar invested in the stock market in 1970 turned into $54 by the end of 2018. Economic growth consistently trumps negative news.

Despite constant headwinds, we make progress. The world is an objectively better place today than it was 50 years ago. For most people there’s more freedom. There’s more wealth. Infant mortality is down. Literacy rates are up. People live longer. Investors have benefited.

You can see that recoiling from the financial markets every time there is gloom on the horizon is a poor strategy. Disconcerting events and unpleasant surprises are a constant reality. If you waited to invest until there was smooth sailing, you’d never put your money to work.

The fact that the world is so full of potential danger and uncertainty is actually a good thing. Investors are paid to take risk. If there were no risks, there would be no returns.

You Have Control of Your Own Behavior

How will you deal with the inevitable ups and downs of the markets and the constant stream of negative news? The answer to this question will determine your success as an investor.

The sheer force of 7.8 billion people trying to improve their lives will ultimately push markets higher. It will not be a smooth journey, but if you are patient and disciplined, it can be a rewarding one. You hold the key to your success as an investor.


Markets are trading purely on emotion, and fear is dominating. I am not sure how long this can continue, however with 10 year notes rallying below 0.40% during the height of the panic, my money is on stocks and risk assets in general to make a decisive comeback and then some over the coming months.

For as long as I can remember, I have been constructive on U.S. Treasury bonds. The trend in yields has been lower from the early 80’s onward despite what many people considered ridiculous levels over the past few years. With that said, the positive insurance-like benefits of holding long duration Treasuries (investor receives a coupon + a potential price hedge against stock market declines) is becoming more problematic and riskier as yields approach 0%. Large negative price swings are becoming an issue for me in this asset class, which means portfolio allocations to long duration paper are being cut down significantly. Unfortunately, this also means that overall portfolio equity weightings may also be decreased as the safe hedge against stock market declines has become riskier given the outright low level of yields.

Given the recent large decline in stock markets generally, I am switching most equity sector opinions to either neutral or overweight while moving U.S. Treasuries to neutral from over-weight for the first time.


Justin Kobe, CFA

Founder, Portfolio Manager & Adviser

Pacificus Capital Management

Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Cambridge and Pacificus Capital Management are not affiliated.

Material discussed is meant for general illustration and/or informational purposes only, and it is not to be construed as investment, tax, or legal advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice. These are the opinions of Justin Kobe and not necessarily those of Cambridge Investment Research, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.

Investing in the bond market is subject to risks, including market, interest rate, issuer credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies is impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counter-party capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Diversification and asset allocation strategies do not assure profit or protect against loss.

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