Once again, we are dealing with a bear market. Like many of you, I’ve seen a few of these. It is easy to get wrapped up in the here and now, but I found that taking some notes in real time can be helpful for when the bear growls next. So, I thought I’d share a few of my bear market observations.
The advice to “stay the course” is sound assuming the course was good to start with, of course. Nonetheless, it is repeated so often during a bear market that it can seem trite. Long-term investors are often mocked in bear markets as pundits point out that this time is different so forget the long term, don’t just sit there, do something. Every time is different, and this time is too, so it is easy for otherwise sound thinkers to get very anxious about what is next. The uncertainty is very high.
One thing I noticed that is often lost is that advisors who place their value on actively maneuvering to beat “buy and hold” are even more stressed than the buy and hold crowd. Being a trader or market timer in a bear market is not easy either.
As tempting as it is to alter one’s approach in the face of such uncertainty, I have noticed that advisors who switch from the buy and hold end of the spectrum and move toward the timer end almost always regret it at some point. They either pay a price for making a bet that doesn’t work out immediately or worse, they succeed. They then fret about whether to try it again or they take on the stress of clients who expect them to do it again.
Switching presents irony. People who are uptight because they don’t know what is about to happen, switch from an approach that does not require a short-term market prognostication to an approach that requires they be right about the market’s direction at the very time they are most uncertain and most stressed about what’s next.
I’ve noticed that avid watchers of the news are more uptight than the less tuned in. It doesn’t matter where they get their news either. In fact, the more professional the journalists, the worse it is because those reports cannot be dismissed as easily as the more sensational. From what I see, the people in the worst state of mind are the most politically active and it does not matter on which side of the aisle they sit.
As to more specific investment matters, I lost count a long time ago how many times I have had to explain that dividend paying stocks are not a safer alternative to other stocks or more dangerously, an appropriate substitute for high-quality bonds. Our clients own plenty of dividend-paying stocks, but the evidence does not justify overweighting those stocks for the above reasons.
The safer stock story usually revolves around the assertion that dividend paying stocks are more mature and steadier. The bond alternative story centers on how investors can get more cash flow from dividends than interest on bonds. Both of those comparisons are generally true but neither makes the stocks safer as a group.
As was the case in August 2009, dividend stocks suffered losses similar to the general market during the Coronacrash. For instance, consider the ProShares S&P 500 Aristocrats ETF (NOBL), a fine fund that tracks S&P 500 companies that are so mature they have grown their dividends for at least 25 consecutive years. From February 21 to March 23, NOBL dropped 35% vs IVV’s (S&P500) 33%. As I write this in late April, NOBL trails IVV by roughly 6% year to date. Many other dividend focused funds underperformed similarly and showed that their risk profile bears no resemblance at all to that of good bonds.
In every downturn, I get a question or two about hedging with options. If markets decline, the options make money offsetting the decline in stocks. When we explain to clients how these things actually work, they do not sound so great. With contract costs soaring as the crisis unfolded, it becomes clear, market timing with options contracts is just as dicey as less interesting methods. You better be right about the direction, time frame, and the extent of the market move to compensate from the high costs. After accounting for taxes, the odds of success are awful.