Over the last 35 years I have always tried to teach people how to make better decisions with their money. I’ve always felt that money looks better in your pocket than it does anywhere else. Recently, because of the Coronavirus, a few of my scheduled talks at public libraries have been cancelled. Because of this, last week I hosted an open conference call to talk about our current situation and to take questions from callers. I thought I would share with you some of those questions and my responses.
One popular question was whether I feel the market has already reached its bottom, or do I think the market will fall further? As I told the listeners, in my opinion, I believe the market has reached its bottom. I believe that the actions of the Federal Reserve and the Federal Government have helped rally the markets from its recent lows. Let’s not forget that we have seen a significant rally just over the last couple of weeks. Go back to March 23rd, just a few weeks ago, when the Dow Jones Industrial Average closed at a little over 18,500. Fast forward to today; the Dow has rallied nearly 5,000 points since then. Of course, that doesn’t mean that we’re out of the woods yet. After all, the markets do not like uncertainty and that is exactly what we have. Therefore, it is possible that if we have another major outbreak of the virus, markets could test new lows. Anything is possible in this upside-down world that we now live in.; however, I do believe we have tested the bottom.
Another popular question was, what can investors do to protect themselves from something like this in the future? My answer was that the best way for investors to protect themselves is to have well-balanced and diversified portfolios based upon their goals and objectives and risk tolerance level. I know this sounds like canned financial, but in reality, it is true. No one could have predicted the effect that this virus would have on the world economy. Regardless of the type of stock portfolio you had, your account suffered over the last month or so. Even investors who have balanced and diversified portfolios saw their accounts go south. However, the real issue is not that your accounts dropped in value; but rather, that you’re in a position that you can ride the downturn without being forced to sell into weakness. My belief is that people with diversified portfolios, coupled with an emergency fund of at least three to six months of living expenses, are able to get through periods of extreme volatility and uncertainty. Just think, if you needed money and were forced to sell stocks a couple weeks ago, you would have taken a significant hit compared to today.
As investors, market volatility is the norm. Markets are constantly influx and we know that over the short run markets can be irrational. The key to being a good investor is to never have to sell at an inopportune time. When investors invest based upon their goals and objectives and have balanced and diversified portfolios, it allows them to get through times like this. On the other hand, investors who try to bet on the market like they would in a casino, unfortunately, find that just like gamblers, they generally end up on the short end. That is why I’ve always believed that having balanced and diversified portfolio, based upon your goals and objectives, and having a proper emergency fund, allows investors to survive difficult markets like the one we’re currently in. In addition, they are generally best positioned for the rebound when it comes, which it will.
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.