Surviving the storm
3 lessons learned from the USCG to help get through the next market drop…
Some months in the stock market feel like the unexpected Nor’easter that pounded the New England coastline the night of February 18, 1952. January of this year began as the worst start to any year for the stock market of all time, down -10% in less than two weeks. With little news to validate this irrational instability, the stock market headed back up to end the month, but is now testing those lows we saw in January.
Inspired by the recent book (2009) and movie (2016) Their Finest Hours: The Coast Guard’s Most Daring Rescue, it dawned on us this story could be a great metaphor for financial planning and investing in, or near, retirement.
The hands down, most compelling piece of this story was the courage Second Class Boatswain’s Mate Bernie Webber and his crew displayed during the mission they were not expected to survive. To see mountainous waves towering 60-70 feet above your 36-foot boat and still be undeterred in your quest to rescue those in peril is why these men were awarded one of the greatest medals our country has to offer: the Gold Lifesaving Medal.
Thankfully, retirement planning, whether far off or already a reality, is not nearly that dramatic. There are some similarities we think can be drawn out of this story. Breaking down the great rescue, three aspects emerge as essential to the success of their mission: knowledge of the dangerous conditions, a reliable vessel, and the courage to endure.
Knowledge of Conditions
The tough start to the year could have generated serious panic if we’d forgotten this was not only possible, but probable. In a letter written to our clients in 2013, we quoted an article in the Economist stating we were in the 56th month of an up market which lasts on average 58 months. Last year we brought this up again, mentioning the up market was in its 68th month. Looking back, it appears the up market lasted 70 months before the correction (down market) began to unfold.
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In the story of the rescue there’s a moment where Coxswain (boat driver) Bernie Webber had to make a split second decision. Facing a monstrous wave he chose not to climb the front side of the wave and potentially pitchpole (end-over-end roll) down the back side but, gave it full throttle and attempted to fully submerge the boat and break through the wave! He was somehow successful, and in doing so, chose a path that saved them from experiencing the peak and trough of the swell.
Knowledge of the conditions allowed Webber to navigate a wave that may not have normally been survivable. Knowledge of the long up market that peaked in May of last year allowed most our clients to navigate the subsequent correction (down market) and stay with the conservative, growing-dividend strategy, instead of getting lured into becoming overly aggressive at exactly the wrong time.
Dangerous conditions in 2016:
- Oilmageddon – Have we finally seen a bottom in oil prices?
- Election Uncertainty – Bernie vs Billionaire? Clinton vs Cubans (Cruz & Rubio)?
- Recession Potential – General consensus is under 50%, but someday we will see recession again.
- Global Slowdown (markets down from highs) – China -47%, Brazil -34%, Germany -28%, Canada -24%, US DOW only down -14%
- Interest Rates – Weren’t they going up? 10yr US treasury down to 1.74%
With uncertainties like these always in our future, the investment strategy chosen must be reliable when we need it most.
A Reliable Vessel
To submerge their vessel and punch through the huge wave, the crew of CG36500 must have had confidence their boat would hold up in the volatile seas. The 1946 36-foot long Coast Guard boat was a heavily built double-ended, self-righting and self-bailing motor lifeboat, with a measly 90 horsepower engine (1/10 of the power of the vessel that replaced it), which was designed to withstand severe sea conditions.
Similarly, your investment philosophy needs to hold up in severe market conditions and the “vessel” you’ve chosen is one of the best. Josh Peters, CFA from Morningstar (Coxswain of our crew) talks about the philosophy of the growing-dividend strategy:
“In contrast to the market value of the portfolio, which I can’t predict, much less control, I can anticipate and influence the growth in our income. If I succeed at increasing the growth of our annualized income at a good pace over time, it’s reasonable to expect the market value will trend upward as well. We may even ‘beat the market’ without explicitly trying, which is exactly what’s happened the last 11 years.” Peters’ and Morningstar’s advice has been invaluable to us and we’re only sorry we didn’t use them sooner.
How has our average portfolio fared? While 2015 gave up some of the gains that were made in 2014 (cannot be attributed to Morningstar), the first 50 days of 2016 have been fantastic! Our average account approximately even versus the S&P 500 decline of approximately -5%. (More conservative accounts are positive and aggressive accounts are down slightly less than the market)
This growing-dividend strategy we use for stocks tends to underperform when the stock market powers ahead like we’ve seen the last few years, but when we see the kind of volatility we’ve witnessed recently, it outperforms. This is how we reduce the peaks and troughs of the waves of the stock market.
Courage to Endure
The last aspect, which is likely the most noteworthy, is the crew’s (right) courage. 
They went out in the storm, stayed out to look for the struggling seamen and then returned bringing all thirty six (thirty-two survivors and four crewmen) back to Chatham, MA in a boat built for twelve.
A tumultuous month or year in the stock market is always a possibility these days, but having the courage to stay invested throughout the ups and downs is the best way to capture the return we all desire. This was true in the much more severe market of 2008-9 when we held on despite fears “this time is different” and that paid off as the accounts rebounded in less than a year. Our confidence has grown and the portfolio has improved and we hope you feel well prepared for this overdue market pullback.
Good news to help endure:
- Unemployment – 151k jobs reported last week, rate at new low of 4.9%.
- Real Estate – Home values continue to increase, especially locally.
- Emotion – Overreaction in stock markets provide great buying opportunities.
- Dollar Strength – Recent reversal last week could be great for multinational companies hurt by currency exchange.
- Interest Rates – Increase potentially halted until mid to late 2016.
- Low Oil – Increase in consumer spending should be a result in the future as more of us have more money in our pockets.
Overall, we are pleased to say our clients are courageous and we almost never have calls requesting panicked selling at our office. While we all need a little encouragement from time to time (even around the office on some days) we feel blessed to have such wonderful relationships with our clients that have endured these emotional markets. We look forward to the day when the storm calms and we can all look at our accounts and smile…again.
Thank you for your time in reading this letter and for allowing us to insert a little personal interest into our work. Tim (lower right) is a Boatswain’s Mate in the Coast Guard Reserve at Surf Station Yaquina Bay (see a video from the station here) in Newport, OR. He will likely make Coxswain this April and is proud to wear the same uniform as these brave men.
None of the information above is intended as investment or tax advice. Please work with a trusted financial advisor before acting on any of the details mentioned. SMB Financial Services/Retirement Income Advisors is a Registered Investment Advisor in the states of Oregon and Washington, and doing business in all states.