I'm not sure if you noticed ...

The most dramatic market change ...

The following is a lightly edited version of a letter sent to FutureSafe clients on March 03 2020. It is reproduced here in the hope that it might be helpful and of interest to the broader investing community. Please note that the information contained herein might be outdated. As always, please consult your advisor or an investment professional before making any investment decisions. This information is provided purely for educational and informational purposes, and please remember that all investments carry risk which might cause you to lose some or all of your investment.

Hi All,

I’ll try to make this as quick and painless as I can since I have a longer (and nerdier) email planned for some time over the next week or so.

I have two things I want to include in this email.

The first is to respond to a question I got from one of you about how bad it can get if the correction turns into a bear market.

The second thing is to tell you about something truly stupendous that just happened in the markets that you might not have noticed. In fact, I think it was more dramatic than the movements in the Stock Market.

But, first things first, let’s get to the question about bear markets:

How bad can it get? What if we are talking bear market?

There have been 12 post-war bear markets. Recall from last week’s email: a bear market is a fall of greater than 20%. In that email, I included a chart from Goldman Sachs and CNBC that showed that there have been 26 post-war corrections so far.

Here is the companion chart for corrections that turned into bear markets.

There were 12 of those, so approximately 1 in 3 corrections (12/38) turned into bear markets. When they do end up becoming bear markets, they can drop as much as 60%. 



If that freaked you out, please … don’t. 

Our safety net is designed to watch the portfolio, make adjustments and try and ensure you stay above your safety net level, even under these market conditions.

And remember that the historical evidence suggests it’s pretty dangerous to try and time these markets. When they do recover (and they eventually do) they recover in huge fits and starts and pops and jumps, so getting out of the market and trying to time the bounce-back of the market isn’t really a good option either.

OK, I got it. So, what’s this stupendous thing you want to talk about?

First some set up. Here is a surprising statistic that you might not have known about.

By last week, the 10 year Treasury rate had already dipped to a never-seen-before historic low of 1.3%.

Wait, what’s a 10 year Treasury rate?

In effect, think of it as the rate of interest you will earn from buying ultra-safe US government Treasury bonds, if you lock up your money in those bonds for the next 10 years.

Ten years is a long time to lock up my money.

It sure is. So think about this: Who are these people that are willing to lock in 1.3% per year for 10 years? How worried would someone have to be, to be willing to lock themselves into a 10 year deal for a measly 1.3% annual return?

Yet, people did. This is presumably an indication of extreme concern about the future and a lack of anywhere else to invest that money.

Was that your punch line?

Nopes. Here’s my punch line.

Soon after the Fed announced their emergency rate cut today, the 10 year treasury rate had further dipped to below 0.91% and ended the day just below 1%

Um, I’m underwhelmed. That sounds low, but is that unusually low?

To appreciate how much of an outlier that is, take a look at this chart below that plots interest rates from 1871 up to 2015. We’ve never ever seen a 10 year rate in the United States this low. At least not since 1871 (when Ulysses S. Grant was President) which is the earliest interest rate data I was able to find.

Not after the ’87 crash. Not after the dotcom crash. Not after 9/11. Not after the Crash of 2008.  Never. Ever.

Not even after The Great Recession when bankers were jumping out of skyscrapers in Manhattan.


OK, I get that it’s at an epic low, but why do I care?

Well, that’ll be the subject of my next (longer and nerdier) email over the next week or so, about interest rates and Fed Actions.

The short version about why you care is that because Treasury Bonds are the sole ingredients of the Safety part of a Safety Net. I want to show you that managing risk in your portfolio is not just about managing your stock portfolio and picking stocks or diversifying. It’s also about deciding on the mix between stocks and bonds and managing the interest rate risk of bonds, especially when bond prices fluctuate with extreme interest rates.

This is one of the things that Goal Based Safety Net Investing does well, and this period of extreme low interest rates on the 10-Year Treasury is a great time to help you understand why we invest the way we do.

Until then, please do reach out to me if you have any questions. My cell phone is below, or just email me directly.