Missing the Recovery: A Cautionary Tale

While many struggle to stay calm during this extremely turbulent time, it is easy to focus on the immediate pain and lose perspective on what lies ahead once the crisis abates.  As advisor and financial partner, our job requires a heavy dose of empathy and sympathy.  At the same time, our responsibility is to provide sound, rational and objective counsel regarding clients’ goals and investment strategy.

We briefly review that counsel here, along with an important flag about what could happen if you miss the stock market recovery.

Our goal is to construct portfolios with a risk profile that coincides with clients’ specific circumstances:   investment time horizon, required rate of return, and cash needs, to name a few.  We attempt to plan for inevitable volatility that comes with investing in the stock market by allocating the proper weighting to defensive and preservation assets – especially for those with current or near-term distribution needs.

But growth is vital to our clients’ strategies, and emotionally charged decisions to liquidate growth assets (stocks) in times of crisis can cause long term harm to their financial future.  A cautionary tale from the nation’s last major financial crisis helps explain why trying to time the market generally doesn’t work in investors’ favor.

During the most painfully unpredictable days of the 2008-09 financial crisis, some investors panicked and moved from stocks to cash thinking that they had found safety by avoiding the bottom of the market.  But by doing so, they potentially suffered massive repercussions in missing critical days of market recovery.

We now know that the market hit a low point on March 6, 2009.  In the two years that followed, CornerCap Large/Mid Composite Portfolio* returned +106%.

However, if an investor had moved to cash prior to February 2009 and mistimed re-entry into the market, here’s what they would have experienced instead:

• 65% return if March 2009 and April 2009 were missed (losing 41% of the recovery)
• 50% return if March, April and May 2009 were missed (losing 56% of the recovery)
• 40% return if March – July 2009 were missed (losing 66% of the recovery)
• 26% return if the best five months of recovery period were missed (losing 80% of the recovery).

Most market disruptions are unique, and this one is no different.   While comparisons of previous market downturns are being reviewed for lessons, especially the post-9/11 market shock, the reality is we do not have an exact analogy for what is happening now.  We are in uncharted territory.  Which is all the more reason to stay focused on the fundamentals and to not deviate from the strategy we have in place.

Your CornerCap advisor and partner is here to help.  We will get through this…together.

* The U.S. Large/Mid-Cap Value strategy is the largest asset class component in most client portfolios at CornerCap.

Past performance is no guarantee of future results, and all investments are subject to risk of loss.