Over the last few weeks, we’ve seen the Coronavirus cause major disruptions to our way of life here in America and around the world.
In the sporting world, the NBA and NHL have suspended their seasons, the NCAA has cancelled its basketball tournament and has indefinitely suspended or cancelled all other spring sports, Major League Baseball has postponed the start of Spring Training, and the PGA cancelled the Players championship and has announced an indefinite postponement of the Masters.
Cities across the country are cancelling schools, limiting the number of people that are allowed to congregate in one place, and are encouraging employees to work remotely from home if at all possible.
The World Health Organization has declared the virus a pandemic, as nations around the world struggle to contain the disease and keep it from spreading further. Italy has seen its healthcare system completely overwhelmed by the strain caused by the virus.
On the investment front over the last month, we’ve seen the world’s fastest bear market (and the first one in 11 years) take shape before our eyes. Coronavirus concerns, along with crude oil prices falling 30%, have caused rare levels of volatility and have led to large selloffs in markets around the world. While typing this, the S&P 500 and the Dow are both currently down around 20-25% from their all-time highs on February 19th earlier this year.
I’m no doctor and can’t offer any substantial thing to say on the health side of this topic (other than listen to the medical community and wash your hands), but I do have some thoughts when it comes to the market and your portfolio:
1.) It’s Okay to Be Scared
I’m here to tell you that it’s okay if you’re a little bit scared right now. Heck, most advisors, if they’re being truthful, get a little nervous when markets drop as quickly and decisively as they have over the past month. We’re in the midst of the quickest bear market in history. If you had $100,000 in the S&P 500 on February 19th (the top of the market), you now have around $75,000. If you’re a little bit closer to retirement and had, say, $1,000,000 in the S&P 500, you have probably close to $750,000 in the S&P 500 now. To have the value of a decent-sized home in most of America just (temporarily) evaporate from your retirement account in a month’s time can be pretty scary!
It’s perfectly fine and normal to be scared right now, just don’t panic. If watching the stock market daily and listening to the talking heads on tv gets your heart racing, maybe turn it off for a few days and read a book or go for a jog instead. The rest of this blog post will be devoted to things that will help you to best navigate this turbulent market and (hopefully) alleviate some of your fears, but I just wanted to start off by saying I feel your pain and you’re not weird for feeling afraid.
Hang in there! It might get worse before it gets better, but hang in there!
Which leads me to thought #2…
2.) Don’t Let Fear Affect Your Investment Decisions
The average investor’s investment returns tend to substantially lag the overall market’s returns. While fees and expenses can be responsible for a small part of this, the primary reason is investor behavior. In investment circles, it’s called the behavior gap and is driven by two main emotions: greed and fear.
Avoid the urge to get freaked out and fearful. If you have money in your 401k at work, stay focused on your long-term goals. If you’re 20 or 30 years away from retirement, this will be a blip on the radar in the grand scheme of things. The market has historically rewarded people for staying invested in turbulent markets and riding it out. The ones that get hurt the worst long-term are those who make knee-jerk reactions based on fear.
Don’t contribute to the behavior gap, keep focused on your long-term investment goals.
3.) Don’t Sell and Go to Cash
“Why don’t we just sell everything and go to cash? We can wait for all the craziness to subside and then get back in on the way up.”
I’ve heard a lot of people ask, why not sell, go to cash, and get back in when the market starts heading the other direction? The reason is that no one really knows when the market will reverse course and these things can change very quickly. If you missed just the 25 best performing days in the market from 1990 through 2018, then then your annualized returns over that period (nearly 30 years) would be more than cut in half! The problem is the best performing days in the market generally occur in clusters around the worst 25 performing days over that same period.
This past week presents us with a great example of this.
On Thursday (March 12th), we saw the single largest daily decline, percentage-wise (a 9.5% drop), in the S&P 500 since 1987. There were a lot of people who were probably wanting to get out and go to cash (many investors probably did). The very next day (Friday, March 13th), however, we saw one of the best performing days, as the S&P 500 gained 9.2%. People who went to cash on Thursday would’ve missed out on nearly a 10% jump in their portfolio!
Markets, when they change direction, can change quickly. In the 2008-2009 bear market, the market hit the bottom on March 9th, 2009. By the beginning of June that same year, less than 3 months later, it was up 41%! I know that this volatility is not fun to go through and can get your stomach churning, but when it comes to your investment portfolio, going completely to cash is probably not the best option. If you are wanting to make some moves with your portfolio that could be advantageous to you in the long run, there are a few things that you can do…. (keep reading)
4.) Use this Downturn to Your Advantage
So what are some good things to do during this market downturn?
Rebalance your investment portfolio
You hear the saying “buy low and sell high” all the time, but fear and greed make this hard for people to do in practice. It seems counter intuitive to sell something that is appreciating in value, only to purchase something that’s depreciating in value (albeit temporarily), but this is essentially what “buy low, sell high” means. Rebalancing helps to take emotion out of the equation. If your portfolio has skewed a bit from your target allocations, then it’s probably time to sell off a portion of the portfolio that has appreciated in value (most likely your bond or fixed income portion right now), and invest in the part of the portion that has fallen (most likely your equities portion).
A good rule of thumb is that if an asset class has moved more than 20% plus or minus from its relative weighting, then it’s time for a rebalance. For example, if your target allocation in small cap stock is 10%, then if it goes below 8% {10% - (10% x 20%)} or goes above 12% {10% + (10% x 20%), then it’s a good time to rebalance.
Increase your 401k Contributions
““Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.””
The stock market is on sale right now. For every dollar that you spent on investments in mid February, you can buy the same thing for a 70 to 80 cents right now! By increasing your 401k contributions now, you’re able to take advantage of this temporary dip and buy more assets for less.
Pick Up Stock that You Like on the Cheap
I’m a big advocate for using predominantly broad-based index mutual funds and ETFs for the vast majority of your savings for retirement. With that said, if you have some play money that you like to try your hand at stock picking, then this might be a good time to buy some companies on the cheap. If a particular stock still feels a little too expensive to you now, you might want to try to put in some limit orders over the next few weeks at a price that you feel is reasonable and you might get lucky with all of this volatility.
Of course, if stock picking isn’t your thing, it’s perfectly fine to just purchase the entire stock market on a discount too by purchasing a solid broad-based index fund, such as Vanguard’s Total Stock Market ETF (VTI).
Conclusion
It’s completely normal to feel a little bit scared during this market downturn, but its important not to panic and let it affect your investment decisions. No one truly knows what the market is going to look like over the next few weeks and months, but it’s looking like it might get worse before it gets better. Keep invested in the market and rebalance accordingly. If you want a more detailed investment analysis of your particular situation or feel like you need the help of a professional, sign up for a free initial consultation with me.
Finally, listen to medical professionals and take all the precautions that they suggest. Let’s flatten the curve of this thing!
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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Daniel Patterson, and all rights are reserved. Read the full disclaimer here.
