Coronavirus and the Markets
We are currently experiencing meaningfully down days in the stock market. Covid-19, otherwise known as the Coronavirus, has markets on edge. Several clients, understandably, have expressed concern. Some want to “plow more cash” into the markets, essentially chasing a discounted stock price. Others fear they should be worried about their long-term plans. A couple of clients simply want to hear our stance on this ongoing issue. In this light, please take a look at the following:
When markets are “easy” we quickly forget about the risks we are taking when we make investments. It is not until a selloff occurs that investors are reminded of the fact that account value can change dramatically. As humans, we have a strong affinity toward avoiding loss. Given this hardwiring, our emotions tend to kick into high gear when markets drop. When money is on the line, hardly anyone can navigate their emotions adequately. Markets generally see money pouring in near highs and selling off near lows. I do not need to tell you that this is the exact opposite of what should be happening.
So let’s start with this…
Take a deep breath.
We’ve been here before.
Stocks temporarily fall from time to time for a variety of reasons. If they didn’t, that would mean there is no risk when it comes to investing. If there were no risk, there would be no return. As you can see in the chart below, the S&P 500 has historically fallen by 5% three times per year, 10% one time per year, and 20% or more every handful of years. These sorts of pullbacks, corrections, and crashes are built-in features of our market. Meaning… you can’t be in the market and not experience them.
You likely agree that pullbacks aren’t something to lose your cool over. I imagine, though, that a particular question is circling in your mind. “What might this turn into?” I don’t think this is an unreasonable question. Every time stocks fall a little, there’s the possibility that they wind up falling a lot. Unfortunately, no human on Earth can answer this question without making some large guesses. Let’s shine some perspective on the question, though.
This is the 18th time since the market bottomed in 2009 that the S&P 500 is more than 5% off its high.
Over the last 50 years investors have experienced four deep drawdowns. These have ranged from -36% to -54%. Four in fifty years… needless to say, they’re pretty infrequent relative to all the days you are invested. And we have recovered from all of these drawdowns plus some.
This data is not to say that we should pay no attention to what’s happening. Market pullbacks are painful when they happen, and they can interfere with important financial plans in our lives. It is important, though, that we keep perspective. Perspective is the antidote to rampant emotional reasoning.
So… again. What might this turn into? I do not know. I wish I could tell you when the next meaningful market drawdown would be. If there were rigid rules for how these things play out, everyone would be following them. Instead of focusing on everything that is beyond our control, though, we prefer to focus on the controllable factors surrounding your wealth. Here are a handful of these controllable factors:
Spending - When uncertainty is high in the markets and we are experiencing a pullback, it is unwise to go making large, unnecessary purchases that require meaningful sales out of your accounts. Again, selling low is never a good thing.
Liquidity - If you are lacking liquidity in your overall financial puzzle, it may be wise to carve out a sliver of your portfolio to invest in low-risk assets that are there when needed. These are the funds that are there to cover expenses in the short-term. Most clients keep this in the bank. We have low-risk options within our portfolios here as well. For those with monthly disbursements, we generally keep at least one year of monthly payments in low-risk bonds or cash.
Risk - The more risk you take, the more you are expected make. In addition, the more risk you take, the more you must also be willing to lose. Put simply, the more bonds you have in your portfolio, the more muted your drawdowns will be during times like these. We have had conversations about your risk tolerance. If an event such as this had made you reconsider your risk tolerance, contact your advisor.
Diversification - It’s important to remember that you may not be invested entirely in stocks. The media is mostly reporting on the performance of the large cap U.S. stock universe. Your account may be diversified to include other asset categories… stocks, bonds, commodities… all within our borders and beyond. This impacts performance.
The virus will certainly create a difficult landscape for multinational corporations in the short term. You should expect continued volatility in the coming weeks and possibly months. The question is – how long will this last? This question is unanswerable at this time. In light of this uncertainty, it’s important to review the controllable factors above.
Aside from the economic impacts we are seeing from the Coronavirus, we want to remind you all to stay healthy. In the U.S. the seasonal flu is still a greater concern than the Coronavirus. Whether it’s the coronavirus or the flu, the most powerful advice we can give you right now, believe it or not, is to wash your hands!