Originally, I had planned to write a different column; however, with the Coronavirus and the recent meltdown in the market I thought it was important to address what is currently happening. Obviously, the Coronavirus has caused uncertainty in the market which led to the market’s recent retreat. The Coronavirus has also caused fear to return to investors. Fear is an emotion that, as far as I’m concerned, can cause more damage to someone’s portfolio than even the Coronavirus. Fear causes investors to react irrationally and to make short-term decisions that can cause long-term harm to your portfolio.
As long as I’ve been in the financial world, I’ve always encouraged investors to have diversified portfolios. Diversified portfolios are meant to protect someone, particularly when fear grips the market. I have no idea when the markets will turn around; neither does anyone else. However, one thing I do know is that in any crisis we have been through, markets eventually turned around. In fact, if you go back over the last decade or so since the end of the Great Recession in 2009, we have had over twenty or more drops in the market. After each of these drops, over a short period of time, the markets regained their strength and reached record highs.
What has also happened in each one of those downturns is that too many investors sold out and went to cash with the idea that once the markets rebounded, they would get back into the market. Unfortunately, what all too often happens is that those investors who bailed out never get back in the market and thus, never have an opportunity to recoup their losses. In fact, there are still investors that bailed out during the financial crisis and unfortunately, never got back into the market and missed an incredible run over the last 10 years. Investors who think they can time the market are unfortunately mistaken. No one has been able to time the market consistently over any period of time. Remember, when you time the market, you have to be right twice; once when you buy and once when you sell; and again, no one, not even the greatest investors of our times like Warren Buffet, have been able to do this. Again, the reason you have a diversified portfolio is for times such as this.
I received a number of calls and emails from clients who are obviously concerned about the recent retreat. My general advice to those investors is that they should stay the course and weather the storm. Again, downturns and market volatility are the norm. We have seen market crises before, and we will see them again. There is no reason for investors to panic. That doesn’t mean an investor with a balanced and diversified portfolio is not going to see some losses on their accounts due to the crisis. However, the losses will typically not be as severe as for people who do not maintain a balanced and diversified portfolio. When investors don’t diversify, as far as I’m concerned, it’s more apt to gambling, and what I have always believed about gambling is that they don’t build those big, beautiful hotels in Vegas because people win.
Although we have seen market downturns, disruptions and retreats in the past, what is a new phenomenon over the last number of years is the way the media covers these disruptions. We see it all the time where the media over-hypes an event, and in many situations makes a mountain out of a molehill. In Michigan, we see it all the time where every snowfall is going to be the storm of the century. Based on the hype, schools and public institutions close only then to get two inches of snow. I’m not saying that the Coronavirus is not a significant event, because it is. However, this is just a reminder that in today’s world with social media and how mainstream media hypes stories, we must be cautious and not let short-term comfort cause long-term pain.
There is also another issue and that is what investors can do to take advantage of the current situation. One thing that many of you should consider is whether you should do a Roth conversion. With the markets taking a temporary retreat, you can potentially convert your traditional IRA into a Roth IRA at a lower cost. Remember, when you do convert, you have pay tax on the amount you convert. Therefore, with the market temporarily down, you can take advantage of Roth conversions at a potential lower tax cost. In addition, whenever fear grips the market there eventually will be a good buying opportunity.
I wish I knew when this crisis will end, but I don’t and neither does anyone else. However, as history has shown, we will get through this crisis and investors who don’t let fear and despair dictate their investment decisions will find that their short-term pain will result in long-term gain.
Rick is a fee-only financial advisor. If you would like Rick to respond to your questions, please email Rick at firstname.lastname@example.org.