Author: Robert Stabile

Coronavirus Outbreak – IS YOUR PORTFOLIO CONTAGIOUS?

With the situation that is currently rockin’ the world; the coronavirus and its impact on the stock market, I want to follow up on our last blog from January 29.

So as for the coronavirus and the impact on the Stock Market in recent days, it is important to put things into perspective. Not to diminish the severity of those who have been directly affected by the viral outbreak, we need to understand that so far the mortality rate of the coronavirus has been statistically less of a threat than most of the past viral outbreaks even our own common flu within the US. See chart below which consists of research I pulled from the CDC.

As far as the impact to the United States: for SARS, Avian, MERS, there were 0 US Cases. For Ebola there were only 11 cases, of 7 which originated from outside the US and only 2 fatalities. Zika inflicted 4,115 cases, with only 139 borne inside the US and no fatalities. As of 2/25/20 there were only 53 cases of coronavirus in the USA, 39 of which came from outside of the US and no fatalities.

Now look at the chart below which consists of CDC data regarding our own common Influenza outbreaks in the USA.

         Source: https://www.cdc.gov/flu/about/burden/index.html

   You can see that there were 61,000 deaths out of 810,000 hospitalizations as a result of complications of the flu. That is a 7.5% mortality rate for those hospitalized. True, the percentage is much smaller if you used total number of illnesses. However, at this point it seems to me that our own common flu is much more of a threat than the coronavirus.

So why is there so much fear? I think this excerpt from an article which appeared in Psychology Today sums it all up:

“If It Bleeds, It Leads: Understanding Fear-Based Media”
Deborah Serani, Psy.D. – Psychology Today June 7, 2011

   Fear-based news stories prey on the anxieties we all have and then hold us hostage. Being glued to the television, reading the paper, or surfing the Internet increases ratings and market shares — but it also raises the probability of depression relapse.

   News programming uses a hierarchy of if it bleeds, it leads. Fear-based news programming has two aims. The first is to grab the viewer’s attention. In the news media, this is called the teaser. The second aim is to persuade the viewer that the solution for reducing the identified fear will be in the news story. If a teaser asks, “What’s in your tap water that YOU need to know about?” a viewer will likely tune in to get the up-to-date information to ensure safety.

So how does this apply to the coronavirus? Let’s take a look at some recent headlines: 

  • Global stock markets plunge on coronavirus fearsBBC News 2/24/20
  • Stocks Plunge After U.S. Confirms Second Case Of CoronavirusForbes 01/24/2020
  • Apple’s coronavirus warning just shaved $34 billion off its stock market Value – CNN Business 2/18/20
  • US STOCKS- Wall Street sell-off deepens as virus spread sends investors fleeingReuters 2/25/20

With headlines like those above, it’s no wonder investors are bailing out of the market in droves. Now there are many reasons the markets are affected by the coronavirus, such as slowdowns in business due to quarantines and the impact to international trade. But it is mainly the fear of the coronavirus, stemming from the inability of the medical community to get a handle on its unknowns at this time, which is accelerating this trepidation. And the reaction of investors to the headlines is exacerbated because of this. That said, we need to put this in perspective. The chart below represents market reactions during viral emergencies.

As for the Coronavirus, as of 01/01/20 the S&P 500 is down around 22.55%, the Dow Jones Industrials is down around 26.61% and the Russell 2,000 (US Small Stocks),is down 35.75%. You would think we are in an Armageddon where it comes to the Stock Market. That is because the media is causing hysteria with using headlines with big numbers like “Dow Suffers 3,239 Point Drop this Week” or “Dow Plunges 1,100, Worst One Day Point Drop in History!”

Putting that into perspective, at the time it dropped 1,100 points it was a 4.5% downturn for the day. So, let’s take some snapshots in history of when the Dow lost 4.5% or greater in one day.

  • 09-29-2008 – Dow Down 777 pts for a 6.98% drop. Dow then was around 10,365
  • 08-08-2011 – Dow Down 634 pts for a 5.55% drop. Dow then was around 10,810

And there are many more examples. The statistics are easy to find.

You see, although the above numbers were not the “worst point drop in all history,” as a percentage the point drop was much more damaging to the Dow than yesterday’s 1,100-point drop. Yet the media focuses on the drama of the large number of points to draw investors into panic because an 1,100-point drop sounds much worse that a 4.5% drop. And the media does this to keep investors glued to their TV stations or publications. (Actually, for each of the cases above, they were the “worst point drops in history” for those two specific dates).

Take a look at our previous Blog… IN LIGHT OF THE CORONAVIRUS OUTBREAK… IT’S A GOOD TIME TO LOOK BACK ON HOW THE STOCK MARKET HAS PERFORMED DURING PAST VIRAL OUTBREAKSyou will see that immediately after the market’s downturn during all of the past viral outbreaks, the market recovered significantly and then some within in six months to a year. In fact, most market corrections, and yes, that is where we are in at the moment, take approximately 111 trading days, or just short of four months to get back to the all-time highs. So that said, there is no reason to panic.

This is a great time to rebalance your portfolios to take advantage of the sales in the market. You should look at any short-term fixed income positions inside your portfolios, (which should be slightly up at this time) and consider selling some of that to buy more equites. Because there is no doubt there will be a recovery at some point in the future. And you want to be in it owning more equities!

Most seasoned investors will hold their ground and take advantage of the novice investors who may panic and retreat from the market. Seasoned investors will look to buy in because right now the market is on sale at 20-25% off. My job as an Investor Coach is to keep spreading the seasoning over all our clients. I am proud to say our coaching has been effective. This week we have already received several calls from clients looking to buy into the market and zero calls from any clients in panic mode wanting to sell.

So my coaching message for today is simply this: don’t panic. Remember the days of being on the Cyclone at Coney Island? It was a wild ride but we all managed to get off in one piece. I assure you that this, too, will pass!

Robert Stabile owns Higbie Advisory, LLC a Registered Investment Advisory located in Melville, Long Island. He has over 30 years’ experience in personal risk management and has spent the last eight years as an investor coach dedicated to helping clients understand their true purpose for money, understand what Wall Street costs them and delivering Nobel Prize Investment. Strategies that meet the Prudent Man’s Rule of Investing. Higbie Advisory, LLC is partnered with Matson Money, an ERISA 3(38) fiduciary. Robert Stabile’s articles have appeared in such well-respected publications as “Small Business Today Magazine,” “Long Island Business News,” Providence Business News, and others. He can be reached at rstabile@higbieadvisory.com. Look for Robert’s new book “Investing – Without the Bull” coming out this spring.

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In Light of the Coronavirus Outbreak… It’s a Good Time to Look Back on How the Stock Market Has Performed During Past Viral Outbreaks

When it comes to your portfolios, history has proven that even as we take heed of a serious virus spreading westward from the Far East, it is never a time to panic, even as the U.S. equity markets have seen a slight down tick in trading as investors keep watch on a deadly flu outbreak emanating from China.

But if history is any indication, and what else do we really have to go on, it’s important to take into account that back when other infectious diseases, such as SARS, Ebola and the avian flu were wreaking havoc, Wall Street appeared to remain immune. Therefore, the popular thinking is that a stock market that closed out 2019 with the best annual return in years will likely not feel any ill-effects from recent headlines.

Still, according to a recent piece on the financial website “Market Watch,” many investors are recommending caution. “Risk velocity – the pace at which major risks and ‘black swan’ events can affect asset prices – is elevated in today’s markets compared to 10 years ago for three key reasons,” said Seema Shah, chief strategist at Principal Global Investors, in a research note, referring to the theory for the impact of unexpected events on markets and economies, popularized by Nassim Nicholas Taleb in his book The Black Swan: The Impact of the Highly Improbable. The strategist goes on to say that a social-media driven news cycle, the interconnectedness of global supply chains and a pricey stock market, make Wall Street more vulnerable to a black swan. “External shocks can derail economic trends and abruptly alter market sentiment. Not all risk is economic policy or monetary,” wrote David Kotok, chairman and CIO at money manager Cumberland Advisors, in a recent research note.

On January 24 of this year, the Dow Jones Industrial Average DJIA, -1.35%, the S&P 500 index SPX, -1.34% and the Nasdaq Composite Index COMP, -1.66% ended the day and week lower and stocks were turning sharply lower early Monday, January 27.

It is important to remember that historically Wall Street’s reaction to such outbreaks and quickly spreading diseases is often short-lived. According to Dow Jones Market Data, the S&P 500 posted a gain of 14.59% after the first occurrence of SARS back in 2002-03, based on the end of month performance for the index in April, 2003. About 12 months after that point, the broad-market benchmark was up 20.76% (see table below):

Separately, the S&P 500 rose 11.66% in the roughly six months following reports of the 2006 Avian flu virus — a fast-moving pathogen also known as H5N1. The market gained 18.36% in the following 12-month period.

Data are similar for equity performance across the globe based on data from Charles Schwab, tracking the MSCI All Countries World Index 892400, -0.43%. The index has gained an average 0.4% in the month after an epidemic, 3.1% in the ensuing six-month period and 8.5% a year later (see graphic below):

“Market Watch” goes on to further explain that the severity of the virus, ultimately, will dictate the market’s reaction and just because indexes had managed to shrug off the contagion from outbreaks in the past doesn’t mean that will be the case this time. For example, coronavirus comes during the important Lunar New Year, when Asia tends to see peak travel and consumer spending. As of Friday, January 24, Beijing had shut down parts of the Great Wall, as well as 16 cities, restricting movement of some 46 million people, and canceling many events related to the Lunar New Year.

Our conclusion is it that it may be possible for the coronavirus to spread quickly within and beyond China, which may cause economic and market damage. However, investors need to understand that we cannot draw certain conclusions about anything that may affect stock-market performance. This includes pandemics. Equity markets are random and unpredictable, and such events should not be examined in a vacuum. Our unyielding coaching advice: It is never a good time to panic or attempt to time the market!

Robert Stabile owns Higbie Advisory, LLC a Registered Investment Advisory located in Melville, Long Island. He has over 30 years’ experience in personal risk management and has spent the last eight years as an investor coach dedicated to helping clients understand their true purpose for money, understand what Wall Street costs them and delivering Nobel Prize Investment. Strategies that meet the Prudent Man’s Rule of Investing. Higbie Advisory, LLC is partnered with Matson Money, an ERISA 3(38) fiduciary. Robert Stabile’s articles have appeared in such well-respected publications as “Small Business Today Magazine,” “Long Island Business News,” Providence Business News, and others. He can be reached at rstabile@higbieadvisory.com. Look for Robert’s new book “Investing – Without the Bull” coming out this spring.

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When It Comes To Your Investment Portfolio….ENGINEERING MATTERS!

On July 1, 1980, the newly constructed Hyatt Regency Hotel in Kansas City, Missouri, featured several suspended walkways crossing its multistory atrium. Preliminary plans called for the fourth-floor walkway to hang from the ceiling, connected by steel rods. In that design, the rods would barely hold the weight of the walkway itself, and would not have passed local building codes. Those supports were included in the final construction, and to make matters worse, the second-floor walkway was suspended from the fourth-floor walkway directly above it, doubling the load on those parts.

On July 17, 1981, the linked walkways crashed to the dance floor below, killing 114 people and injuring another 200. The structural engineer in charge of the walkways blamed the design flaw on a breakdown in communication, but the Hyatt Regency walkway collapse has become a popular case study in the ethics of engineering.

The Hyatt Regency had to fork over $10 million in settlements due to poor engineering decisions. Are you prepared to let poor engineering decisions cost you what you have invested in your portfolio?

When it comes to putting together your investment portfolio, I can’t stress this point enough: engineering matters. Unfortunately, proper engineering isn’t a clean strip of highway laced with all green lights on the way to your financial destination. It can come with various potholes that could easily, if not properly navigated, knock the wheels off any smooth-running vehicle. And if you think it can cost a lot of money to fix your car, imagine what the cost would be to fix a badly-damaged portfolio. Ouch!

When it comes to properly engineering your portfolio, there are three potential “potholes” you need to be aware of, so pay attention (no driving and texting, please). They are:

1. Misconception
2. Three Critical Components
3. Common Sense Rules

MISCONCEPTIONS
Misconceptions start with the misplaced perception that access and fees are the only determining factors for returns, as follows:

  • Access – you can go online and trade thousands of options.
  • Fees – how much you are going to pay in management and/or transaction fees.

If, indeed, you are being encouraged to go online and trade without help or guidance, then who exactly is leading you down this misguided path? That’s easy; journalists, who need you to keep reading their articles, and websites, that entice you in and then encourage you to speculate and gamble.

But having information, whether it is good or bad, isn’t all you need to make a well-placed investment. What good are having the tools if you don’t know what to do with them? Hand a brain surgeon a scalpel and I’m feeling pretty good about that patient lying on the table. But hand me that same scalpel and, well, maybe that patient wants to be somewhere else. Bottom-line: Having access to scalpels does not make you a brain surgeon, anymore than having access to a lot of investment products makes you a great money manager. Access and fees are not the only determining factors for returns.

THREE CRITICAL COMPONENTS
The first thing you need to know about engineering is that how you engineer a portfolio is critical, particularly as it speaks to what goes in and at what specific percentages.

Determinants of Portfolio Performance

  • 1.8% Market Timing
  • 2.1% Other Factors
  • 4.6% Stock Selection
  • 91.5% Asset Allocation

How can some say engineering is not important when it is seemingly the most important factor? It only makes sense that the more access you have, the more likely you are to build an inferior engineered portfolio. It can’t be possible that all pie charts are equal, but to a novice they can look the same. Even professionals have a hard time discerning the differences.

For instance, let’s look at two pie charts. How would an investor know the difference?

Differentiating well-engineered portfolios from poorly-engineered portfolios is hard because small changes can have massively different outcomes. Just as a novice wouldn’t be able to tell the difference between a well-constructed bridge and one that’s about to collapse. But they all have one thing in common: Engineering matters. And not only do you have to engineer a portfolio, you also have to have a strategy to execute throughout time. Because you can have a well engineered starting point, but still destroy your results over time. You can’t just get in a plane with no experience and fly it. Nor do you want to fly in a plane with a pilot who has no experience.

Even if you start off with a well-engineered portfolio, you have to execute and stick with it over time. Here are some execution fails by so called “professionals”:

  • Chasing commodities
  • Chasing gold
  • Chasing tech stocks
  • Panicking during a crash

Engineering and execution are not universal constants but they are critical. Here are some possible reasons advisory firms would choose not to show real performance:

  • They don’t know how
  • Too expensive and time consuming
  • Embarrassed by live returns
  • Simulated returns are superior
  • Fantasy is better than reality
  • Easier to lie than tell the truth

COMMON SENSE RULES
Just because these rules are based on basic common sense, don’t assume everyone knows what they are. But they are rules that should be indelibly etched in your investor sub-consciousness, as follows:

  • Given two identically engineered portfolios and execution abilities, always choose the lowest fees.
  • No two advisers will have the exact same engineering and execution capabilities.Therefore, fees are important but should never be the primary decision-making variable.
  • Engineering and execution will be the primary determinants of investor performance.
  • Firms that have properly engineered and executed portfolios should have actual investing results to display to their prospects and clients.
  • Investment returns should comply with Global Investment Performance Standards and be reviewed by a third party for verification.
  • It is irrational and imprudent for investors to entrust assets to investment advisers who are either incapable or unwilling to provide this much needed information to investors.
  • One of the most powerful questions any investor can ask is simply: What are your actual returns for real investors? Never invest your money with anyone who does not have verified returns.

The importance of proper engineering can’t be over-stressed. When you drive over the Robert Moses Bridge you don’t think for a moment that the bridge might collapse and you’ll end up in the Great South Bay. That’s because you trust that the engineers who built the structure in 1951 knew what they were doing, that they had the expertise and training to keep you safe. And that’s no different from having to trust that the right Investor Coach will help you discover a portfolio that is engineered to provide the best possible return for the level of risk you’re willing to take, with the intended goal of bridging the gap between your investments and your American Dream.

Higbie Advisory, LLC is a Registered Investment Advisor in the State of NY.

Robert Stabile owns Higbie Advisory, LLC a Registered Investment Advisory located in Melville, Long Island. He has over 30 years’ experience in personal risk management and has spent the last eight years as an investor coach dedicated to helping clients understand their true purpose for money, understand what Wall Street costs them and delivering Nobel Prize Investment. Strategies that meet the Prudent Man’s Rule of Investing. Higbie Advisory, LLC is partnered with Matson Money, an ERISA 3(38) fiduciary. Robert Stabile’s articles have appeared in such well-respected publications as “Small Business Today Magazine,” “Long Island Business News,” Providence Business News, and others. He can be reached at rstabile@higbieadvisory.com.  Robert Stabile’s new book “Investing – Without The Bull!” will be coming out in April 2020.

 

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