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Addendum to the April 2020 Vista 401(k) News

Vista 401(k) Plan Performance for the First Quarter 2020

By Michael Sheridan

When analysts in my business try to dissect recent and current movements in the economy and the stock and bond markets, we try to use facts, history, established metrics and global events to make sense of money movement.

We find ourselves in an unprecedented time where nothing of the past seems to make much sense in our analysis. Fear is almost as epidemic as the virus and has a disproportionate impact on investing decisions.

Let me share one of many examples. I have been saying for around a year that the high-tech companies collectively referred to as the FAANG stocks (Facebook, Amazon, Apple, Netflix and Google, now known as Alphabet) are wonderfully progressive companies. Their stock is grossly overpriced based on the actual earnings of these companies and multiple other factors. There are many other companies that probably could be included in this group (e.g., Microsoft) but they are actually making a profit and are also expensive per share but not extravagantly so.

You would think that these companies’ stock would sell off the most during this crisis but that is not happening. I think that in our altered society, these companies are staying open and our citizens are patronizing them for products and services that are of extra value during these lockdown periods.

In the reverse to these phenomena, we are not driving cars nor using as much power during manufacturing and commerce slowdowns. The price of oil, added to by the trade war between the Saudi’s and Russia, has driven the price of gas to a low not seen in many decades. The value of oil producing companies’ stock as well as any business that is involved in the production of oil has plummeted below replacement value.

If we are in lockdown, how do we shop for cars? If we are unemployed, why do we need banking services? Every business is affected, mostly for the worst but some are for the better.

As much as the stock market has sold off, it will get worse after we get complete calendar quarters earning’s reports that reflect this global shut down unless a vaccination is discovered and the end of the pandemic is in sight.

The Bond market will continue to be viewed as a safe haven. Interest rates for borrowing and then paid on those bonds are at lows not seen in decades. Some fund managers are investing in lower grade, riskier for pay back, bonds and other forms of debt, that are just not worth the risk in a retirement plan. Although Vista 401(k) prohibits including these types of riskier funds in our plans, some retirement plans are engaging in something I call “chasing returns.” This is the practice of investing some or all of their investors’ money in higher interest payment bonds but riskier (that means the company issuing some of the bonds defaults and you get nothing or less than full value).

Yes, this is a tough time for investors. We are sticking to the conservative side of the process which means the funds will suffer with the rest of the market but the underlying investments should not fail. We believe that the stock market will eventually recover but that might take years. Bonds should stay fairly close to breaking even.

Your plan has suffered significant losses for the year to date in values for every stock fund, with most of those losses happening in March. Our stock benchmark, the Standard and Poor’s 500 Index was down almost 20% for the year, with over 12% just in March. The S&P Aggregate Bond Index is + 2.8% for the year and our American Century; US Government Bond fund is up 5.8% for the year and is the plan’s best performer for the year to date (YTD). The only other positive gainer for the year is American Century; Inflation-Adjusted Bond which is up .2% for YTD. Only two funds in our plan were “in the black” for the quarter.

If “not losing much” is a complimentary performance conclusion, the three Vanguard balanced funds were only modest losers for the quarter. Not much of a compliment but it could have been worse. We have observed that these funds are well managed over the years so we have to view that these three funds show gains on a three and five year basis. I know that this is not that much consolation but measured over those periods, you are still showing a profit.

The afore-mentioned FAANG stocks and their similar “high tech- high performance” sector companies, resulted in our riskiest fund, T. Rowe Price; Blue Chip Growth, as a reasonable performer in that it lost less in value than any other stock fund in our plan on a YTD basis at -13.2%. These FAANG stocks are selling products and services that we still want even during this crisis.

The eleven American Target Date funds show the wisdom of what we have been lecturing on for years; Diversify, Diversify, Diversify. Most of them lost less or performed comparatively well with other equity based plan funds.

I can only hope that fear does not overwhelm you and that you will join the millions of others who diversify and have rebalanced your portfolio. These losses in current value are very difficult to accept but I do not have any magic wands and like you, must wait it out until someone invents the vaccine. The only acceptable return is on the conservative bond funds and the safest of them all is the US Government Bond fund, our top performer.

Some so called experts recommend that you cash in all the plan’s funds and go “ all in” to the Money Market fund (or the Government Bond fund) . I can only tell you that this would be terrible. You would lock in your losses and invest during an extremely low interest rate environment (.3% YTD) that would take years and maybe decades to get back to even. Your only recourse, as tough a decision as it will be, is to keep investing in plan shares as the prices go even lower, through your payroll deductions. If you have not rebalanced by this time, it is probably too late. Ride it out.

Let’s stay together through this crisis and use good judgement to protect ourselves and others.