This past week was so unusual that it may well have been the first week ever where every day was one of the 100 best or worst days for the S & P 500 Index since 1928! It also ended one of the longest bull markets in history and officially entered a “bear” market. A “bear” market is defined as a 20% or more drop in the major stock market averages. The coronavirus, or COVID-19 as it is officially being called, is causing havoc around the globe, and has certainly felt its effect on our markets.
Investors are right to be concerned about their portfolios and markets, since the unknown always plays a role in our emotional makeup in how we digest news and make decisions. There is little doubt there will be major disruptions to our economy and lifestyles, but they may be temporary. However, the way markets have reacted, you would think something greater than a slowdown was happening. Regardless, investing involves taking risks and we are often reminded of them during periods like this. The stock market, and even the bond market to some degree, involve taking risks. Risks are an unfortunate necessity in order to achieve good returns. If there was little risk, then the rewards would not be enough to satisfy our outcome(s).
It is also important to keep in mind markets have suffered big declines and bear markets in the past, and markets have recovered and gone higher.
Here are a few thoughts to help investors navigate through these turbulent times:
Resist Headline Investing
We must come to grips that there will be negative headlines over the short term. There will be more infections and more fear about what impact they will have on our economy and way of life. The financial & other media outlets will be ripe with recession talk, job losses, etc. Fear and greed are two words investors should come to despise more than coronavirus. Both can cause investors to take action they might later regret. As long-term investors, if we truly are long-term investors, we must resist the urge to let these headlines influence our longer-term game plan. They will be difficult to tune out for sure, but necessary to achieve investment success.
Bull Markets beat Bear Markets
It might not seem like it, but historically, bull markets outlast bear markets. According to JP Morgan research, bull markets have lasted nearly 5 years on average, while bear markets have lasted a bit less than 2 years dating back to 1929. The bull market we have seen in U.S. stocks ended last week, and there is no reason to worry about its end. After all, it was one of the longest in history and was bound to end at some point. Bear markets normally occur every six years or so, so maybe we should not be as unhappy about the bull market coming to an end. In the scope of a long term investment horizon, bear markets are normal and nothing to be feared. Remember, bull markets are not created during bull markets; they are born out of bear markets.
Play Offense, not Defense
Again, it is painful to watch our portfolios decline during downward trending markets. However, rather than hit the panic button, maybe we should hit the “play” button and consider investing new money into a market like this. If you are working and are part of an employer retirement plan like a 401(k), then you probably already dollar cost investing at every pay period. Maybe we should take our cues from our 401(k)s and consider investing a set amount each month, cash flow permitting. If you are contributing the maximum to your retirement account, then great! If you can do more, then now may be the time to consider opening a Roth IRA, where your contributions and investments grow tax-free. If you are ineligible to contribute to a Roth IRA due to income restrictions, then you may want to consider opening a non-retirement (taxable) account. Or, maybe you want to consider converting some of your IRA assets to a Roth IRA since your IRA is most likely down in value. You would pay less in income taxes on the converted amount. In other words, there are ways to take advantage of weak markets. Don’t let fear grip you to the opportunities out there.
(Re) Assess Your Risk Profile
Every investor should know or figure out their tolerance for downside risk. How much downside are you willing to assume or endure should dictate your asset allocation between stocks and bonds. Your allocation should not necessarily be driven by your age, which is contrary to what the media says. Your allocation should be driven by your specific goals and if those goals are longer than 15 years+, then your allocation should have a growth tilt to it. If you had been too conservatively positioned, then this type of market may be a good time to shift your allocation more toward growth to meet your objectives. On the other hand, if your allocation was too aggressive, then it may make sense to reduce risk, even after a decline in your portfolio. The current market environment should not be the determining factor for a risk change; your goals should!
In conclusion, for retirees, this is the time to hunker down and know that if your portfolio was positioned well before the decline, it should not make a difference to your goals even though the value of your portfolio is lower. For pre-retirees, this is the time to be looking at making Roth contributions, increasing 401(k) contributions, if you can afford to, and investing in non-retirement accounts, in order to take advantage of lower prices in the market.
Once the health of the nation and world stabilizes, I believe the market will reassess quickly. You want to make sure your portfolio is positioned for the eventual recovery. In the meantime, keep the above thoughts in mind if markets remain volatile.