Is This the Bottom? | Erik Averill, Brandon Averill | AWM Insights #4

Episode Notes

The financial market upheaval that has accompanied the COVID-19 epidemic has been a teachable moment for investors. The S&P had been down 34% and investors wondered if it would ever stop falling. People were asking if they should take their money out of the markets - another form of trying to time it. Then, in 3 days, the market bounced back 17%, which was the biggest 3-day gain since 1931. As of March 31st, markets have reclaimed nearly 50% of the decline that happened. 

So then, can we confidently claim that this is the bottom? Does it even matter if we can know or not?

There are plenty of voices online and in the media who are ready to tell you who to buy and who to sell, but the questions you should be asking are: Who should we trust with our financial advice? Who is actually qualified to give that advice? 

Listen to this week's episode to hear Erik and Brandon discuss these topics and more.

+ Read the Transcript

Erik Averill (00:00):
Hey everyone. Welcome back to another episode of AWS insights. I'm your host, Erik Averill. And I am joined as always by my cohost, older brother, Brandon Averill certified private wealth advisor and the co founder of AWM. Brandon, welcome to the show. Exciting times in the market. I mean, this is absolutely wild, uh, what we're experiencing. And I also think it's, uh, one of the best teachable moments for investors in, and the reason I say that is through the close of the market, uh, this previous Monday, the 23rd, the S and P 500 was down 34%. And I think the general sentiment around investors was as like, is this thing ever going to stop falling? And a lot of emotion was, was around that. And so I know there were high tensions people asking should we take our money out of the markets and ultimately trying to time it in one situation.

Erik Averill (00:58):
But then we see this reverse course over the next three days. Uh, the market would bounce back more than 17%. Going on record is the biggest three-day gain since 1931. Um, and today we're recording this podcast on the last day of the quarter. And, uh, the trailing five day performance is a positive 7.37%. And, uh, so as today, the markets have already reclaimed 50% of the temporary decline. Um, so it has me asking and I think a lot of other people asking Brandon is can we confidently claim that last Monday was the bottom? And, uh, does it actually matter if it was or wasn't?

Brandon Averill (01:40):
Eric, it's a great question. I'm hearing it a lot as well. And I would say that, uh, can we confidently say it's the market bottom? Absolutely not. I don't think there's anyone out there that can, uh, reasonably make that assertion if they are, they're probably kidding themselves. Um, and to the question of ultimately doesn't matter. Uh, again, the answer is probably not. Um, yes, it would matter if we had a predictable way of knowing that that was the market bottom. Uh, if that was the case, right, we would probably have seen much bigger increases cause everybody would be flooding into the market. Uh, if you had confidence of knowing, knowing that. So when we look at all the evidence, um, and kinda take that assumption knowing, Hey, we got no shot to, to understand whether this is the market bottom or not. Uh, we turned to the data and I thought this was really helpful.

Brandon Averill (02:33):
This is a good, uh, exercise that we work through. Um, but it was really what's the impact of timing of the market. So let's assume we were the worst market timer of all time and we, uh, decided to invest our money on average at all time highs. Uh, what is, what do those returns look like if we put all of our money, uh, into the market at all time highs? And what we find is on average one year later, uh, your return would have actually on average been about 13.3%. Uh, and then five years later it would have been about 8.7%. So, you know, one good observation there is, uh, even at all time highs, you're still having a positive investment experience. Uh, if you were lucky enough to have some model to actually invest, uh, on average when the market had declined 20%, uh, we compare that and your one year average return would be about 14.2% and five years would be about 11.8%.

Brandon Averill (03:36):
So, uh, certainly higher. Uh, and we would expect that, right? If we're for investing when markets have declined, but I think that good observations from this or to that on average in both scenarios, we have positive investment returns. Uh, and the second thing that is that on average between the two, we're right in line with market averages over time. So, uh, at the end of the day, the good news is we don't have to try to figure out when the market bottom is because it's darn near impossible, if not impossible. And, you know, if we are just invested and we continue to be in the market, uh, we're going to get something close to market averages returns. So, you know, we kind of go back here at AWM that, you know, is, is today a good day to be an invested in the market? Uh, generally the answer is absolutely yes.

Erik Averill (04:26):
Brandon, that's a, that's fantastic information. And w one of the things that stood out to me was your emphasis on, let's go back to the data. Uh, what is the evidence say? And the reason I think that's so important is during crisis times, one of the most dangerous side effects that we see is now everybody's both a medical expert and a financial expert, right? In this a Corona virus conversation, all it takes is popping on social media and everybody's offering an opinion and it, and it's scary. It can be devastating. I know I live here in Arizona and unfortunately after president Trump had just made a comment about potentially using a malaria type medicine, some people self-diagnose and sadly ended up killing themselves. And while, uh, that might be an extreme, when it comes to your financial advice, we're seeing the same thing, right? Is whether it's, you know, Hey, Delta, Delta can't go down this much and now is the opportune time to, to buy the individual equity.

Erik Averill (05:25):
Or you know, we had a, a surgeon, uh, providing advice on whether they should buy Exxon. And so what's happening is you're having all of these amateurs come along in offering advice. Uh, when in reality you should be asking the question of who should I trust when making financial recommendations and who is credentialed and you know, who really has this fiduciary obligation to your family. And so we just highly encouraged people to take a step back during this time and make sure that, you know, the, you are taking advice from have the, uh, you know, the credentials and the expertise in doing what's in your best interest. And so, uh, Brandon w one question that we covered on a previous podcast is what is this value of real expertise that comes from an advisor is something that you could share with us of the type of value that, uh, that a qualified expert should be providing to you during these times?

Brandon Averill (06:24):
Fantastic question. You know, I laugh at the, uh, the example of the medical doctor, uh, giving financial advice. I think a lot of our listeners here, a lot of our clients, right, you're experts in your fields and it's, it's almost laughable, uh, to, for the athlete, right? For for me to, Hey, just cause I played a little pro ball, I'm going to jump in there and, and uh, hit the grim slider. Right? Uh, that's just not, that's kind of funny. And, or if I'm going to hop in there and perform a hip surgery, uh, it's equally kind of laughable, but for some reason, everybody becomes a financial expert during these times. And I guess it makes sense. You know, we're looking for confirmation from people, uh, that we trust. Uh, but really when we turn and look where the value comes, uh, the value comes from taking the data again, right?

Brandon Averill (07:12):
And using a systematic approach to make financial decisions. And so, uh, one thing that we've turned to and we've referenced previously on this, uh, on this podcast is opportunistic rebalancing, um, and really having a systematic approach. So sharing with you guys, you know, this happened to us, uh, over the last week. So last Friday and Monday, we actually had our tolerance bands that our models hit. And thankfully we've implemented a systematic, uh, way of, of taking advantage of that information. Uh, when our target allocations move, in most cases, 20% off of their target allocations, then we go through a systematic approach of bringing those, uh, accounts and allocations back in line with what our targets are. You know, I'm not gonna stand here and say that we were so good to have called what at least appears to be the bottom for the short term period on Friday and Monday to implement these.

Brandon Averill (08:14):
I mean, that was definitely luck. Uh, we'll be the first to admit that, but, uh, sometimes it's better to be lucky than good. And we were very fortunate to have the systematic approach, uh, in place. So basically if you take a 60, 40, uh, 40% fixed income or bonds and 60% equity, what had happened is our equity allocations had declined with the rest of the market. Um, and they hit that 20% tolerance band. So we were able to then, uh, go into action and go ahead and sell some of that, uh, fixed income, some of those bonds that had increased in value and bought some of the stocks that had declined in value. Uh, and fundamentally what ended up happening is we were able to buy those stocks on Friday and Monday when the markets appear to at least for the time being, hit that, that bottom. So a really good example of having that process in place and the market went on to take off. So now we're sitting in a pretty good position for the wealth creation for our clients and our accounts.

Erik Averill (09:17):
Brandon, thanks for, for sharing that. You know, and I know it's hard to quantify those types of things, but Vanguard had done a study previously that, that, uh, that, uh, intelligent rebalancing adds, uh, about a half of a percent of annualized return to a portfolio. So, uh, which is meaningful over the longterm. And so really appreciate you sharing that. And so listeners, we appreciate your guys's attention. Uh, we know that these are tumultuous times, but, uh, we encourage you to control it. You can control, stay focus, stick to the longterm plan. And we will join you guys on another episode of AWS insights next week.

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