Personal Wealth Management / Market Insights

July 2020 – Listener Mailbag Part 2

We answer listener questions about the market effects of a potential second wave of COVID-19. We also examine the investor phenomenon of “breakevenitis” and whether gold brings a shine to your investment portfolio during times of volatility. This episode features Client Communications Group Vice President Naj Srinivas, along with Managing Editor Todd Bliman; Client Services Program Manager Wendy Nicholsen; and US Private Client Services Executive Vice President K.C. Ellis.

Full Episode Transcript

Naj Srinivas:

Hello, and welcome to the Fisher Investments Market Insights podcast, where we discuss the firm's latest thinking on global capital markets and current events. I'm Naj Srinivas, group vice president of client communications at the firm. And today is part two of our listener mailbag for the month where we answer more of the popular questions we’ve received from listeners and investors.

If you missed part one, which originally aired in early June, look for it or ever you get your podcasts. In part one, we answered questions about the fears over government debt and possible inflation impacts from various governmental COVID-19 aid packages. And part two, we'll be discussing what a potential second wave of the coronavirus might mean for markets. And we'll also answer questions about the idea of selling stocks once you hit a certain breakeven point after a big decline, like the one we've just been through and subsequent recovery. And we'll answer listeners' questions about gold as an investment during times of volatility. So let's get started. To help us answer these questions, we'll tap into the experience and expertise of some leaders at Fisher Investments to get their perspective on these issues.

Thanks and enjoy the episode.

Naj Srinivas:

One of the most frequent questions we've received recently, particularly as parts of the US began reopening from their lockdowns, is what impact the potential second wave of COVID-19 could mean for markets. When you hear the term “second wave” in the media, what they're talking about is a resurgence in the virus’s spread. Viral outbreaks often go through natural cycles where infections peak and then recede. A second wave could come after infection rates have been brought under control, and the number of cases have dropped substantially. This could be caused by either mutations in the virus that lead new infections, or it could just be the natural ebb and flow that occurs with the seasons, like with the common flu. Whatever the cause of the second wave, there are potential impacts for stocks.

Todd Bliman:

Well, the second wave of the virus, it could mean a number of different things for markets. But it really depends upon how severe is that second wave, how severe to governments react to it, and how does that relate to expectations? That's ultimately what it boils down to.

Naj Srinivas:

That's Todd Bliman, he's the managing editor of the Portfolio Management Group at Fisher Investments. Todd and his team generate regular and capital markets commentary on, our online daily news magazine. So, Todd is used to looking through the hype to find useful information for investors. That means he's the perfect person to help us understand the important factors that investors should be on the lookout for when it comes to understanding a second wave and the potential market impacts.

Todd Bliman:

If you look right now, perhaps one of the biggest fears out there—and it's understandable—is that we'll get a second wave of the virus, and that it'll be as bad or worse than the first wave of the virus that we've just been through. And that was a pretty bad wave.

And a lot of folks fear this coming back in the fall, or perhaps later, and renewing lockdowns and creating another disruption to economic activity.

If the second wave of the virus emerges, there are actually several factors that would combine to determine what the market response could be. In reality, what we're looking for is not so much just do you get a second wave? It's how big of a second wave? How to governments respond? Do they respond with similarly extensive lockdowns as we've seen, or are they lesser or are they greater? And in that way, really what you're most interested in finding is how does the reality of a second wave–if we get one–relate to the expectations of the second wave. And that's really what will determine things most for markets now.

Obviously on a human level, no one wants to see a second wave, but we have to be aware of that possibility for markets. And markets are actively discounting that now given the ubiquitousness of that fear and headlines. So I think it's important again, to remember that how a second wave would impact markets is going to be mostly determined by how the reality of that second wave relates to expectations that are already in place for that second wave.

Naj Srinivas:

Given the uncertainty surrounding each of these factors—the size of the second wave, the government's response and how those compared to investor's expectations—people want to know how to react.

Todd Bliman:

Right now. I think the best thing one could do is just be patient about it, because no one really has any edge or informational advantage in looking at the possibility of a second wave.

And you know, one thing we always say around here is, a key to investing is trying to know something that others don't. And right now, even the virologists don't know whether we're going to get a second wave. So it's pretty hard to say that one group of investors has an edge over another one based on expectations of a second wave, especially when that's a fairly common fear that's out in the public.

So I think right now there's just not anything currently in existence that would give you the kind of informational advantage you'd need to make an investment decision based on a second wave.

Naj Srinivas:

The bear market that started in February 2020 transitioned to a bull market as it bounced off its bottom on March 23rd. That makes it the quickest bear market in modern history. Since then, though, the S&P 500 has recovered over 75% of its losses. Often when you see a recovery bounce like this, markets don't retest their previous lows, which focuses investors attention on previous highs. And as markets get closer and closer to those previous highs, many investors wonder what their next move should be.

A question we often hear from listeners and our clients is whether they should sell their stocks once they've broken even with that previous market high or hit some arbitrary level in their portfolio. It's the phenomenon we call "breakevenitis." And how you react to feelings of breakevenitis could have big impacts on your ability to reach your long-term goals.

To help us understand this issue. We'll talk to Wendy Nicholson. Wendy's a program manager with our US private client group and Wendy presents to clients all over the country, answering their questions and addressing their concerns about current events or market happenings. And she’s seen breakevenitis up-close. Here's Wendy:

Wendy Nicholson:

Breakevenitis is this feeling to get out of stocks when you get back to a previous high point or some arbitrary mark set in your head as an investor. It is a very human thing. We're all human. Investing is hard. Breakevenitis sets in for a lot of folks.

Naj Srinivas:

As Wendy mentioned, breakevenitis can be a common sentiment for investors. So it's important to understand where this feeling comes from.

Wendy Nicholson:

The psychology of breakevenitis gets into the study of what's referred to as "behavioral finance." And while we know that behavior isn't often the first thing that you think of when you think of money and investing, behavior and emotion do drive a lot of investing decisions for folks.

Now, there's a study—several studies really—that show that we as humans feel the pain of a loss two and a half times more than the same sized gain. So going through that pain or say a downturn in the market, you're feeling that two and a half times as much as an equal sized gain in the market.

So the feeling is that I cannot go through that again. Our brains tell us to refuse to go through something like that again. "Get out when you get to break even." We often hear investors say things like "sure, this recovery is great, but when I get back to break even I'm going to cash out just in case" or "I'm $5,000 away from my break-even point." There's this fixed place in the mind, but really for no reason, other than emotion, and emotion is not a good driver of investment decisions.

Naj Srinivas:

But identifying and understanding the causes of breakevenitis are only part of the issue. We also need to understand how to counteract it. And to do that, we'll bring back Todd Bliman, who has some ideas on the right investing mindset to avoid the feelings that lead to breakevenitits.

Todd Bliman:

I think key thing is, you know, it sounds very almost sports coach thing to say, but don't get too high and don't get too low. Try and remove emotion from the equation as you approach markets.

I think that's perhaps the best counsel to take the emotion out. Try to remain focused on your long-term goals and needs. Remember the reasons that you owned equities in the first place. Nobody invested in equities with a goal of breaking even after a big downturn.

The aim and investing in equities is generally you have some goal or objective or reason that you're going to need growth for some or all of your portfolio in order to meet your needs over your time horizon.

And so if you make a radical decision, exclusively based on what's happened in markets, in terms of recovering where you were before, you'd be making a decision that's almost entirely backward looking and is disconnected from your goals and needs.

Naj Srinivas:

When investors think about getting out of stocks, what they're really thinking about is changing their portfolio’s mix of stocks, bonds, cash and other investments. That's called asset allocation. And it's a critical tool in both meeting your long-term investment goals and avoiding breakeven items. Here's Todd again:

Todd Bliman:

Asset allocation fits into breakevenitis, mostly in the sense that there was a reason that you invested in the mix of stocks, bonds, cash, and other securities that you did. That asset allocation should be crafted. And the recommendations that we make to clients are targeting those folks, long-term goals and needs. And if you're going to make a radical change to asset allocation, based on something like breakevenitis, that risks making a backward-looking decision about what the market did already. That could jeopardize reaching your long-term goals and needs.

And I think asset allocation is–there are many studies showing that it's–the most important investment decision anyone can make. And if you deviate from an asset allocation, that's likely to reach your long-term goals and needs. You need to have a very good reason to do so. And something backward-looking like this just doesn't seem like that to me.

Naj Srinivas:

Let's say you're like many retirement investors and your investment objective is long-term growth. Chances are, you've got a pretty hefty allocation to stocks. But what Todd is saying, is that even though you suffered a setback during a stock market downturn, that setback hasn't altered your need for long-term growth.

So we counsel our clients to determine why they're considering changing that asset allocation. Is it some fundamental change to their investment goal or objective? Or is it just an emotional response to what's happening in markets? And as Wendy Nicholson said a bit earlier, we don't think emotion is a very good driver of investment decisions.

Naj Srinivas:

If you watch TV or listen to talk radio, there's a good chance you've come across commercials touting gold as a good addition to your investment portfolio. We've received a lot of questions in recent weeks about gold as an investment. So to help us provide some perspective, we've talked to K.C. Ellis, who oversees all of our customer service operations for our US private client group. Since he's in close contact with our clients, he gets questions about gold quite a bit. Here's K.C. :

K.C. Ellis:

We get questions about gold all the time, and they really come in lots of different forms. For some people, it's simply a question of diversification. “So should we hold gold in the portfolio just to have a small portion of our portfolios in gold?” And for some people, particularly during periods where gold has done very well—you would see this certainly in the early part of the 2010s—you would see that even a little bit right now, as gold is up pretty nicely in 2020, more of what I would call kind of heat chasing—you know, the fear of missing out. “So gold has been up, should I hold something in my portfolio?”

Naj Srinivas:

You may even be wondering why those commercials for gold tend to show up more often after there's been a bout a stock market volatility? Here's K.C. to explain:

K.C. Ellis:

You know, I don't know why gold has become such a popular topic during periods of volatility. One: because gold in and of itself is actually quite volatile as an instrument. I think there's a few theories that people hold onto. One is that gold over the long term, has been a hedge against inflation. And when you hear gold sold, and that's certainly one of the primary reasons that people will sell it.

You know too, I think there's something tangible about gold relative to things like stocks or bonds. For the most part, with a stock or bond, you can't see it. You can't hold it in your hands. It's not tangible. Whereas when you think about gold, whether it's gold bars or gold bullion, or it's gold on and your necklace or your watch, those are tangible. You can touch it, you can feel it and you can see it. You can visualize it. And I think that really has a lot of appeal to some investors over time.

Naj Srinivas:

Appeal is one thing, but when it comes to the idea that gold can hedge an investor's portfolio against inflation, or as some proponents suggest, against market volatility, does reality really match the perception?

K.C. Ellis:

Gold over the very long term, has mostly held up pretty well as an inflation hedge. There's a very famous old saying, I don't know who said this, but this was one of the first things I was taught when I came to Fisher, the idea that a hundred years ago, an ounce of gold bought a very nice man suit. And today an ounce of gold still buys you a very nice man suit. And I think that's a good analogy. It's mostly true. And I think it's pretty good indicator that gold has held up as a hedge against inflation, but for the most part, that's about it. And really, if you look at the long-term returns of gold—and you can take this back, many, many, many decades—you'll see that gold is actually very volatile.

Naj Srinivas:

But we haven't seen rampant runaway inflation in the United States for almost 40 years. So, we need to look at what sort of returns gold might actually add to a portfolio.

K.C. Ellis:

There have been a couple periods for instance in the last 30 years where gold has done very well. This would have been the mid to late 1970s. It would have been the early to mid 2010s. And outside of that gold was a pretty lousy investment.

 So if you didn't hold gold, that entire period, or you missed the boat on either of those two meteoric rises, not only did you not keep up with inflation, you probably didn't get much return at all.

So gold is a little tricky from that standpoint over the long term. Yeah, it's been an inflation hedge, but you really had to time it right in order to capture that, which certainly most people did not do.

In terms of it being a hedge against volatility. I think that's really up for debate. You know, if you think back to 1975, there have been 11 calendar years where global stocks had been negative. So only 11 times have stocks been negative for the calendar year. If you look at gold during those same 11 years, it was positive in five of those and negative in six. And so I think that begs the question certainly over longer periods of time, does gold really do much in the way of hedging against volatility? I think a lot of that's probably more confirmation bias and probably more as a little bit in terms of cherry-picking of your time frame, it's actually quite volatile on its own.

Naj Srinivas:

Since golden seems to attract interest during times of stock market volatility, it's best to look at how gold holds up against stocks in the long term. Here's K.C. again to explain:

K.C. Ellis:

You can just take a look at the growth of a dollar over a long period of time, whether or not you bought gold, you bought a bond or you invested it in US stocks. So, we'll just think about it from 1973 to 2020—if you took $1 and you put it into gold—by the time you got to roughly the end of March of this year, your $1 turned  into 15 bucks, which is, you know, not bad. That's a 15X return, but if you take in that same dollar and put it into 10-year bonds, you would have ended up with something like $28. And if you take in that dollar and simply bought stocks and held on to them for the duration of that period, it would have been $103. So that delta between stocks and gold, just during that time period is immense. If you go back even further than that, the differences get even greater. And again, remember what the goal that almost all of its return over that 40-year time period was really driven by two very short periods. And if you miss those periods, you effectively got no return at all. So for the most part, relative to stocks, it's been a lousy investment.

Naj Srinivas:

So given all of this, the question listeners and investors ultimately want answered is what role should gold play in their investment portfolios? Again, K.C. Ellis with that takeaway to wrap us up.

K.C. Ellis:

Well, our view on gold as an investment is that, it's certainly not part of what we do. If the client wants to hold gold in their personal portfolio, they're certainly welcome to do that. They believe it's important as a means of diversification, few percentage points of their net worth? I don't think there's really anything wrong with that, but I think if it's a core part of your portfolio holdings—I think that's where it starts to create problems.

Warren Buffet's very famous thoughts on gold is that, gold is one of the only investments in the world that in and of itself really creates no value, has no inherent value other than doing things like maybe making jewelry. And even that to some degree is less important today than it used to be. It creates no income. You don't get a dividend, you don't see any cashflow from it. Doesn't produce earnings. And in many ways it actually costs you money to both store it and insure it.

So if you have a hundred thousand dollars in gold bars, you've got to have a big chest of somewhere to store and hold that stuff, not to mention transport them. So from our standpoint, it just doesn't make a lot of sense as a core part of somebody's portfolio, but for a couple of percent, for somebody to do it on their own, there's probably no harm in that. It's not something that we would recommend as a portion of the portfolios that we manage.

Naj Srinivas:

A big thanks to Wendy Nicholson, Todd Bliman and K.C. Ellis for their expertise and help in answering these listener questions about COVID, breakeveitis and gold.

And as always a very big thank you to Eric Foll and Hayley Thorton for helping produce this episode.

If you'd like to learn more, you can visit the Market Insights podcast page, there you'll find links to our COVID-19 resource page, as well as more detail on breakevenitis and gold as an investment, you can also listen to older episodes like part one of this listener mailbag. You'll find a link to the page in our show description.

And if you have questions for our next listener mailbag episode, email us at We'll try to include as many as we can and our next listener mailbag episode.

And if you like what you heard, please subscribe to this podcast. You can follow Fisher investments on LinkedIn, Twitter, and Facebook, and you can find our Fisher Investments channel on YouTube as well.

For our latest capital market insights, check out the MarketMinder  section of our website,

And if you're interested in being a more well rounded investor, I'd encourage you to check out another Fisher Investments podcast from my good friend and colleague Michael Hanson. Michael is our senior vice president of research at the firm. And he's the host of a new podcast, The Well-Read Investor.  

In my 15 years working with Mike, he's helped think more deeply about investing, psychology, life and just what it takes to be successful. In The Well-Read Investor, he helps you do the same.

In each episode, Michael interviews, the author of a book that could help make you a more well-read, well-rounded and well-informed investor. New episodes publish every other Wednesday, and you can find The Well-Read Investor  wherever you get your podcasts.

Join us for our next episode, where we'll get a unique perspective on personal finance topics with Jill Hitchcock, Fisher Investments senior executive vice president for our Private Client Group.

Until then I'm Naj Srinivas, stay safe and be well. Thanks for tuning in


Investing in securities involves the risk of loss. Past performance is no guarantee of future returns. The content of this podcast represents the opinions and viewpoints of Fisher investments and should not be regarded as personal investment advice. No assurances are made, we will continue to hold these views, which may change at any time based on new information analysis or reconsideration. Copyright Fisher Investments, 2020.


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