We have officially entered a bear market for stocks as of March 11th, 2020. Typical financial planners and pundits advocate low-fee Index Funds like the Vanguard S&P 500 fund (500 largest capitalization US stocks) for the long run.Unfortunately, these index funds hold some of the stocks hardest hit by the Covid-19 market scare.
The stocks in these indices include airlines (American, Delta, Southwest, etc…), Hotels (Hilton etc…) and worst of all: Oil Companies. The price of oil has recently tanked over 25% very quickly. Even though the government will support some of these industries, I fully expect some oil companies to declare bankruptcy. This means that the indexes might be slow to recover and will absolutely under perform a basket of stocks that does not include high-debt companies in capital intensive industries.
If your portfolio is $100,000 or more, there is absolutely no reason to use index mutual funds or ETFs. Smaller accounts unfortunately can only get diversification through these funds. However, if your account is $100k or larger, an ideal portfolio will contain only capital efficient companies with low debt that can survive a major recession. Having a good brand and excellent products that customers can’t live without is also a good idea. Fortunately, this is exactly how we construct our stock and bond portfolios at Quantum Capital. We have never owned an oil companies, airline, hotel, nursing homes, or real-estate development trusts. The debt of these companies is generally too high and the price of a commodity or economic shock can decimate this type of holding, or worst case, drive them into bankruptcy where common stock holders get zero.
During the fastest bear markets (we are in the fastest bear market in history), all stocks, including the good ones are dumped at the same time. However, recovery occurs quickest in the companies with low debt, strong balance sheets and good brands. We have a multi layered approach and screening process to find these companies and do a deep dive into their financials and market positioning.
Today, stocks are on sale and valuations have come back to earth. Hopefully your adviser pared down your stock holdings or moved to lower-priced stocks prior to downturn as we did for most accounts in December and January. For a faster recovery, make sure your stock and bond portfolios match the discussed criteria. Your portfolio will be sure to recapture the old highs faster than the indices. For more discussion on how long a bear market takes to recover, see our last newsletter HERE.
Please don’t hesitate to call us with any questions or concerns about your Schwab account or about your accounts with other brokers/advisers.
Best Regards,
John F. Henek
john@quantumcapitalinvestments.com
Quantum Capital Investments Inc.
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