This year has certainly been off to a rocky start. But as you work to keep your loved ones safe from the spread of COVID-19, remember to keep calm, stay rational and remain informed about your investments as well. This is an emotional time for everyone, there’s no doubt about it. But one of the greatest dangers to your wealth may not be the market’s dips and dives, it may be the temptation to make emotionally charged decisions regarding your wealth.
The long-term effects of a pandemic on the economy are indisputable. When told to stay inside, people are unable to patronize local restaurants and stores. One person’s spending is another person’s income. That, in a single sentence, is what the $87 trillion global economy is. This relationship, between spending and income, consumption and production, is the core of how a capitalist economy functions.
With uncertainty surrounding the economic stability of our country, it’s okay to have fears and anxieties surrounding your own savings and investments. The most productive course of action from here is, if you have questions, to reach out to us (or whoever your trusted advisor might be) and discuss your options. It is easy to have knee-jerk reactions when it feels like the bottom is falling out, but it is imperative to make decisions using evidenced-backed data and a level head.
A Brief History Lesson
The market’s negative response to a health crisis is nothing new. The table below shows performance of a balanced (60% stocks, 40% bonds) investment strategy following a few historical crises. Each event is labeled with the month and year that it occurred or peaked. The subsequent one, three, and five-year annualized returns start from the first day of the month following each crisis.
Although a diversified global investment strategy would have suffered losses immediately following most of these events, the financial markets recovered over time, as indicated by the positive five-year cumulative returns. Sudden market downturns can be unsettling. But historically, returns following sharp downturns have been positive.
|Crisis||After 1 Yr||After 3 Yr||After 5 Yr|
Oct 1987 Stock Market Crash
US Savings & Loan Crisis 8/1989
Asian Contagion, Russian Crisis, LTCM Collapse 9/1998
Dot Com Crash 3/2000
Terrorist Attack 9/2001
Bankruptcy of Lehman Brothers 9/2008
US Debt Downgrade 8/2011
In US dollars. Represents cumulative total returns of a balanced strategy invested on the first day of the following calendar month of the event noted. Balanced Strategy: 12% S&P 500 Index, 12% Dimensional US Large Cap Value Index, 6% Dow Jones US Select REIT Index, 6% Dimensional International Value Index, 6% Dimensional US Small Cap Index, 6% Dimensional US Small Cap Value Index, 3% Dimensional International Small Cap Index, 3% Dimensional International Small Cap Value Index, 2.4% Dimensional Emerging Markets Small Index, 1.8% Dimensional Emerging Markets Value Index, 1.8% Dimensional Emerging Markets Index, 10% Bloomberg Barclays Treasury Bond Index 1-5 Years, 10% FTSE World Government Bond Index 1-5 Years (hedged), 10% FTSE World Government Bond Index 1-3 Years (hedged), 10% ICE BofA 1-Year US Treasury Note Index. Assumes monthly rebalancing. For illustrative purposes only. S&P and Dow Jones data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. ICE BofA index data © 2019 ICE Data Indices, LLC. FTSE fixed income indices © 2019 FTSE Fixed Income LLC. All rights reserved. Bloomberg Barclays data provided by Bloomberg. Dimensional indices use CRSP and Compustat data.
Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be construed as investment advice. Returns of model portfolios are based on back-tested model allocation mixes designed with the benefit of hindsight and do not represent actual investment performance.
Why is it important to take a look back in time? While there are no guarantees the current situation with COVID-19 will follow a similar pattern to the above crises, it helps us to better understand and put into perspective that historically over long periods of time, despite an epidemic, stocks typically regain their upward trajectory. Sticking with your plan helps put you in the best position to capture the recovery.
As we explored above, all assets rise and fall in value and the more extreme the swing, the stronger the sentiment. Overcoming this market psychology is no easy feat but learning how the market works can help to reduce stress.
Your investments are designed to support your long-term objectives, not today’s needs. In situations like this, it is important to have perspective and remember that swift market drops are not unusual. Of course, the headlines are scary and fear of the unknown is scariest of all, but the nature of the market is that it will go up and down. That is just par for the course.
What Should You Do?
When market corrections occur the media tends to add fuel to the fire. It’s important not to make any alarm-induced moves during a correction. Instead, stay vigilant re-evaluate your risk tolerance, goals and strategic financial plan. If nothing has changed than stay the course.
Acknowledge that the market is not just about winning and losing – it’s about strategy and duration. The virus and how it spreads is completely out of our control, but our reaction to the financial markets is something we can control. It’s not fun seeing your portfolio drop, But at the same time, we know market volatility is normal and expected. The key is to “zoom-out” and look at the long-term big picture.
What We’re Doing
What we do know for a fact is that the market will continue to do three things: It will sometimes go up, it will sometimes go down, and sometimes it will barely budge. The other absolute certainty? Your financial well-being is our number one objective.
We are focused on what we can control, monitoring the situation as it unfolds and recommending actions as appropriate. For example, as prices drop, we will seek out any opportunities to tax loss harvest an underwater position. This will lower your tax bill by generating a realized capital loss without substantially altering or impacting your long-term investment outcome. Additionally, we are rebalancing portfolios as they drift from strategic target to realign with your long-term goals, just to name a few,
If you have any questions about your specific situation, please contact us. We are here to help and we are here for you. Thank you for your continued trust and confidence.