Should COVID-19 Change Our Investment Decisions? | Erik Averill, Brandon Averill | AWM Insights #16
Episode Notes
With a spike in Coronavirus cases around the country, we continue to see multiple industries getting shaken including airlines, cruise ships, and travel destinations. Alternatively, we see the top tech companies (Google, Facebook, Microsoft, Apple, and Amazon) combined currently represent more than 20% of the S&P 500, which makes sense with more people than ever relying on technology to work and stay connected. As we continue to allocate investments, many are wondering if we should try to make concentrated bets on how the Coronavirus might continue to impact different parts of the economy.
However, the main thing to keep in mind is that no one has a crystal ball - no one can see the future. So, typically the best way to prepare for times like these is diversification of your allocations. We've seen throughout history similar trends with different industries rising and falling, and investors who aren't diversified can unknowingly expose themselves to more risk than they intend.
In this episode, Erik & Brandon discuss this idea and address topics like:
What is the home bias?
How diversification can protect against unintended risk and help to capture opportunity
What can we learn from history and data in terms of portfolio diversification?
What is success?
How do we most effectively grow our wealth over the long-term?
+ Read the Transcript
Erik Averill (00:00):
Hey everyone. Welcome back to another episode of AWM Insights. I'm your host, Erik Averill. Joined alongside my co-host, Brandon. Brandon, welcome back to the podcast.
Brandon Averill (00:10):
Thanks. Excited to be here.
Erik Averill (00:11):
Every week. Just so fired up to be here. What I wanted to jump into the conversation about today, Brandon, is the Corona virus has spiked in the recent couple of weeks, and we're starting to even see governors or specific counties start to require wearing masks in public spaces. And you and I were actually traveling this past week. And so, we experienced what it's like to be in an airport or to stay in hotels and be on a flight.
Erik Averill (00:39):
And this has sparked a lot of conversation from investors asking, what's the world going to look like? Is travel going to actually kick back up? Are a lot of these destination places that rely on cruise ships and tourism, what is the impact going to be on their local economies? And so, as we start to allocate investment dollars, should we start to really be thinking how this is going to impact the opportunities? And should we actually make more concentrated investment bet/decisions on this thesis of how COVID is going to impact different parts of the economy? What advice would you have for our listeners who are thinking around the same lines?
Brandon Averill (01:24):
Yeah, Erik, I think it's a great question. We keep getting it and it's a fascinating conversation to be having with people. I know I catch myself getting into it quite often. It seems like there's no way, right? That things are going to change. That business is going to change. I mean, we're all vastly still working from home. We've all bought monitors at home. Do we go back to the office? I mean, there's so many impacts out there that could possibly be made. And so, I think the big thing to remind ourselves of is that nobody knows, and that's a pretty powerful thing. I wish I had the crystal ball for everybody listening, all our clients and myself included, because we'd make a lot of money, but nobody does have that crystal ball. And so, it does go back to the whole concept of diversification.
Brandon Averill (02:16):
This is the best way to prepare for and take advantage of any of the outcomes that do come our way. If we're not diversified, we're just ultimately exposing ourselves to risks that are probably unintended. I thought it was an interesting factor, I read that right now, the five stocks, the five companies, Google, Facebook, Microsoft, Apple, and Amazon, all combined represent more than 20% of the S&P 500 right now. So if we had a shock to the industry that would affect those companies, which is namely tech, we could be revisiting some of the fallout from that 2000 to 2002 tech bubble. And if you're not diversified you're going to have a disproportionate impact on your portfolio. So, I think that's really the way to handle this, is to make sure that you're diversified, make sure that you're not overexposed to any one sector.
Erik Averill (03:12):
It's interesting. One of the comments that you made that caught me was, it's not only necessarily a risk mitigation, but you were talking about, how do you actually capture opportunity? Can you talk a little bit about why that's so important? A lot of times I think when we allocate our public stock market portfolio, we know about the home bias and we know how we can start to convince ourselves is how a specific country or specific sector is going to do better. Can you just talk about, maybe the impact of how you're going to miss opportunities if you're not allocated properly?
Brandon Averill (03:52):
Yeah, definitely. I mean, there's always times in every market, right? That there's the "hot area." So, as Japan in the 1980s, tech in the 1990s, the emerging markets in the early 2000s, and now what we're seeing is US Mega-Cap sell a huge company, Tech and Growth Stocks. And it's just natural. It's part of our hard wiring in our brains to want to chase those things that have done well. They capture the headlines. It's easier to invest in those areas. But what we find is, when you take a look back at what really generates returns, most often it's those areas that provide a lot of value.
Brandon Averill (04:36):
So, like I'd mentioned, I mean, you can definitely get struck by some of those hot areas that might end up not doing so well. The dot-com bubble, for instance, is well documented, but it's often forgotten that small value stocks were shunned throughout the 1990s as they're being shunned right now. And when we look back at that period, it was those small value stocks that actually gained the most value during that period of correction in the tech market correction. So, I think it's just really finding those areas that are still providing a lot of value.
Brandon Averill (05:15):
I mean, right now, what we're looking at, the last five years, small cap stocks, as I mentioned, are only up 7%, which is small in comparison to others. And then your international stocks are actually 15% cheaper. So, many of these companies offer great values right now. And if you're so concentrated towards what is doing well, what is taking the news headlines, where all people are speculating might do well because of the coronavirus, you're going to miss out largely on those opportunities. And you want to make sure that you have the right weightings within your portfolio to take advantage of that. I mean, these are volatile times. We don't know the future. And so, we want to make sure that we're exposed to the entire market.
Erik Averill (05:58):
I think that's really helpful. And it makes me think, right?Once again, this is all about having a longterm investment thought process and plan and goals because it's very boring. You're telling me that, you know what? Don't get caught up in the Robinhood trading, right? Or trying to over-allocate only specifically to tech, it's really this globally diversified low cost tax efficient type investing. But I think it's always good to remind ourselves to take a step back and think through, really what is success? And how do we effectively grow our wealth over the longterm? And just facing the reality that there is uncertainty. And we don't know and we don't have a crystal ball.
Erik Averill (06:45):
And so, the most prudent way to grow your wealth is to make sure that you are taking advantage of what has worked through tumultuous markets over and over and over again. And so, while the certain ingredients may be different, this is nothing new under the sun. These markets have held up through all these different types of crazy events. And so, I think it's really good reminder for all of us to take advantage of what has gone before us and all of the data. And so, audience, we appreciate your guys' attention as always, and look forward to joining you guys next week on another episode of AWM Insights. And until then, stay humble, stay hungry and always be a pro.
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