The First (and Worst!) Quarter is Over: 9 Steps to Take Now

In the first quarter of 2020, stock markets across the globe experienced one of the worst quarters in the history of global financial markets. But maybe it’s time for investors to take a pause and do some strategic thinking, according to Franklin Templeton Multi-Asset Solutions’ Wylie Tollette and Gene Podkaminer. They offer some practical investment wisdom in these turbulent times.

In some ways, the world fundamentally changed in the first quarter of 2020. March alone has shown how long-term market trends can change literally overnight. And yet, we still confront familiar tradeoffs as we turn to rebalancing and positioning our portfolios for an uncertain future. In between trying to figure out how to adapt personally and professionally to the rapidly changing COVID-19 pandemic, virtually all investors—individual and institutional—are about to confront a challenging set of decisions.

What should you do, and when should you do it? This brief list is intended to help provide investors of all types a framework to address these questions.

  1. First, take a deep breath

We have experienced the fastest decline from record stock market levels to a bear market in recorded history—faster even than the 1929 crash that started the Great Depression (see chart below). Markets appear to incorporate new information more quickly these days but are still prone to over- and under-reaction—particularly when faced with an uncertainty like the coronavirus. It is virtually impossible to predict the exact peak or trough, or the behavior of market participants over the short-term; nor is that likely a worthwhile endeavor.

It is understandable that investors feel like their heads are spinning. Step back from that Bloomberg terminal or TV screen, take a deep breath, and try to picture the long view. Many of us have experienced severe market corrections before. And we’ve successfully navigated our way through them, one way or another. We will see our way through this challenging time as well. Red numbers eventually turn green.

  1. Take the long view

This may be a cliché in the investment industry—“that is what they always say after a terrible quarter”—but we believe taking a long-term view is truly essential in framing the asset allocation decisions ahead and positioning a portfolio for success. The asset allocation choices underpinning our portfolios are themselves based on long-term assumptions. The reptilian portions of our brains have evolved to react quickly and instinctually to immediate threats—so called “fast thinking.”1 Taking the long view is particularly important in the middle of a global virus pandemic, which likely activates our

flight-or-fight response where reptilian thought processes can alter our usual investment decision making process.2 Focusing on 3-, 5-, and 10-year performance can help engage “slow thinking” and facilitate more rational decision making.

As Sir John Templeton said, “to buy when others are despondently selling and sell when others are greedily buying requires the greatest fortitude and pays the greatest reward.”

  1. Think risk first

As investors, we cannot control returns—simply recall the last 6 weeks. But, we can control the risks we take (for the most part) in each part of our portfolios. Returns are essentially the “result set” of those risks. Many investors don’t fully understand their actual risk capacity until tested, as it likely was in the last six weeks.