Last night was surreal.
Within a matter of hours, it felt like the entire country went from passively following to realizing just how serious a situation we're dealing with.
From a financial perspective, there's no other way to put it. Markets are brutal right now.
The uncertainty around the virus itself and its potential impact on the global economy has triggered a dramatic selloff in financial markets around the world.
Most investors recognize that markets don't always go up. However, this time it feels different.
The sharpness and suddenness of the recent swings have left a lot of people wondering what they should do.
Even for the most experienced of investors, being told to "just stay the course" or "don't panic" doesn't make enduring market declines amidst a global pandemic any less scary.
If you're feeling anxious, uncomfortable, and currently second-guessing your investment strategy, you're not alone. Everyone is right now.
As humans, we're wired to react to situations that threaten us. It's what kept us alive back in the day.
While no one can predict what the spread of the virus will bring or how the markets react to it, what you can control is how you choose to spend your energy and attention.
Here are some of my thoughts related to the Coronavirus, market uncertainty, and perspective to keep in mind as the situation unfolds.
1) Losses are Normal
There is no reasonable way to predict when, how, or exactly why market declines happen. The only certainty is that they will occur, and probably more frequently than you think.
In a recent article, Ben Carlson outlines that since 1950:
- The S&P 500 has experienced an average intra-year peak-to-trough drawdown of 13.4%.
- Roughly 53% of all calendar years for the S&P 500 have experienced a double-digit correction.
- More than 91% of the time, there was at least a 5% intra-year correction or worse.
Successful long-term investing requires you to endure market downturns to earn market returns.
Without declines, there would be no risk; and without risk, there would be no reward.
It's the very real price of admission you pay as an investor.
2) What is This About?
It's important to take a step back and remember why you're investing in the first place.
Investments are designed to support your long-term objectives, not today's needs.
The whole point of taking the time to build a financial plan is to establish a framework to make decisions with your money that support your needs and goals.
The amount of risk and return you take within each "bucket" is positioned according to when you plan to use it.
Money positioned in the stock market is for future you. If you plan to spend money within the next year or two, it shouldn't be anywhere near the stock market.
If you're a younger investor, it's likely you won't be touching your retirement accounts for multiple decades. If you're at or near retirement, you still need to plan for and have the means to support potentially living into your 80s, 90s, or beyond.
Without this kind of framework in place, it's a lot trickier to make the right decisions that support both your current and future needs.
3) Eggs and Baskets
While the stock market gets most of the attention, a disciplined investment strategy involves having your money spread across a variety of different investment types including bonds, real estate, commodities and cash.
The past couple of weeks have been an excellent example of diversification at work. As stock prices have tumbled, bond prices have steadily increased along the way.
Diversification isn't flashy, but it is effective.
Maintaining a broad mix of investments at all times is the best way for long-term investors to build wealth without exposing themselves to an unnecessary amount of risk along the way.
The next time you hear that the market is up/down "X" percent, remember that this only applies to one index, which is likely just one piece of the puzzle when you utilized a globally diversified portfolio.
4) A Bird in the Hand
When stocks decline, it's not all bad news. In some cases, market volatility can provide opportunity for savvy investors.
If you have a brokerage account, you may now be able to take advantage of tax-loss harvesting and sell certain holdings that would have previously resulted in hefty capital gains to pay.
In doing so, you’ll be able to rebalance your portfolio to the appropriate asset allocation that reflects the level of risk you originally decided.
It's even better news if you're still working and saving through your 401(k) or 403(b). For each pay period and contribution you make, you'll now be buying more shares at a major discount to the levels seen just a few short weeks ago.
Last but not least, for those in their “gap years” of retirement, the recent market selloff may provide you an additional opportunity for tax savings.
By converting retirement savings from pre-tax to Roth accounts, you give yourself more control by electing to pay taxes up front instead of later on when you're required to.
Investors that choose to utilize this strategy now will be paying tax on a smaller balance, resulting in less taxes overall.
5) Not the Time
Periods of uncertainty provide a useful perspective on the dangers of market timing.
I'd guess that tens (if not hundreds) of thousands of investors have made significant changes to their 401(k)s or other investment accounts in the past month; and feel good about doing so.
You might also be asking yourself:
"Why don't we just move to safer investments, wait this out, and get back in when the dust settles?"
Sounds logical right? The problem is that no one knows when that will be. As soon as you get into the market timing game, you need to be right twice; when you sell and when you decide to shift back to stocks.
If you wait until you're 100% confident that the "dust has settled," prices will likely reflect that.
Josh Brown shared some great perspective on this very question in a recent blog post:
I have no clue what the markets will do next in the short term, and neither does the person yelling at you on TV.
Unless you've had a significant change in your life, making a dramatic change to your investment strategy is rarely the right decision.
In most cases, you'll be better off riding out a balanced approach.
In today's world of real-time access and endless news, it's natural to pay closer attention to your investments during times of uncertainty.
If you find yourself feeling anxious or uncertain, the most important action you can take is to talk to your financial advisor and share your concerns. Having someone who knows your family and your goals to provide specific guidance in times of uncertainty is why you hire them in the first place.
Financial planning is a continuous and ongoing process to prepare you for the unknown, and market volatility falls squarely in that category. Declines are expected at a certain degree of frequency and built into a plan.
By establishing a framework for decision making in your financial life, you're much more likely to approach things from a rational mindset that allows you to make the right choices for you and your family.
Brett Koeppel is a fee-only Buffalo financial advisor, CERTIFIED FINANCIAL PLANNERTM , and the Founder/President of Eudaimonia Wealth. Eudaimonia Wealth is a fee-only, fiduciary, Buffalo financial planner and wealth management firm dedicated to helping families prepare for and transition into retirement by providing independent, objective financial planning and investment management advice.