You would not be human if you didn’t feel any emotion about the market’s ups and downs we have been experiencing. As professional investors, who have lived through markets worse than this, we are not immune to the emotions, nor are we going to tell you that you shouldn’t feel these emotions. What we will say is that the quick dissemination of information and the sheer volume of data about the markets make this situation appear much worse than it is. Yes, COVID-19 and the potential economic impact are real. Yes, we could enter a recession. Yes, this causes us all stress and worry. However, let’s not forget that market volatility is nothing new. The chart below shows that market declines do happen frequently, and more often than most people realize. Stocks recovered and ended up with a new market high after every correction and bear market in history.
This should give us some comfort. As long as the funds currently invested in the stock market are not needed immediately, and we have a long runway, time is on our side. Stocks reward us with returns over the long haul. Why? The price we pay, as investors, for higher expected returns, is risk. If investors are not compensated for taking risk, they simply won’t invest. If there aren’t investors, companies can’t grow and be profitable. This isn’t new! This is how the market has worked since its inception. The opposite is also true. The cost of not taking risk, is less return. That’s where bonds come in. Although they offer lower returns, they are less volatile and exist for portfolio preservation. That is why the money we may need in the very near future should be in bonds or even cash.
In our last article, we discussed how fear and uncertainty are powerful when it comes to the market. Although COVID-19 is new, fear and uncertainty are not. As the graph shows below, we have powered through prior scares, like SARS and H1N1/Swine Flu. There is every reason to remain confident that we will power through this one as well.
Fear and uncertainty haven’t only come from scares such as these. We have experienced volatility in the markets due to wars, 9/11, catastrophic natural disasters, policy changes, political instability and the list goes on and on. Yet, there was recovery and much quicker ones than you may think. Recessions have lasted from six to eighteen months, with the average being only eleven months. It seems longer because it is an emotional time. When it comes to investing, emotions can be our worst enemy.
Many of you have heard us talk about volatility before. Why do various market indices go up and down by 5% or more on a given day? There is no real good answer for that. At the end of the day, the “market” is nothing more than ownership in large companies across the globe. The business prospects of these large entities don’t change daily, but due to trading and other factors, we experience volatility. We should ignore the noise.
The internet has been revolutionary, but we often crave the old days where you’d wait until the end of the month to see how the portfolio performed. Checking the portfolio values often is not only unhealthy, but extremely stressful. The more you check, the more stress you will feel. A recent study, noted below, shows that if you check daily, you will see a down day 47% of the time. If you check it weekly, it’s only down 28% of the time. Another way to state this is that almost 80% of the time the markets are up, but if you look too often, you would think the world is ending!
One common question we are hearing is, “Why don’t we just get out of the market, and wait until it stabilizes?” This is a very natural question. However, the problem is that the math is not in our favor. First of all, markets reflect what is expected to happen, not what has already happened. In other words, markets are efficient. So, by the time there is even some inkling that things are turning, the markets will be right back up again and you’ve missed the opportunity. How can you determine when it makes sense to get out of the market? The bottom-line is that getting out of the market requires too many factors to get right. You need to know when to get out, when to get back in, and then you have to earn a higher return to overcome the tax issues that come with selling in non-retirement accounts. The most important fact to remember is that timing is absolutely impossible. We studied market returns over the past 30 years, and 91% of the return during this time period came in only 40 days. So, out of 6,000 possible days the market was open, missing only a few of them virtually destroyed long-term returns.
So, what are we supposed to do? The answer depends on your situation:
Assuming that you are a long-term investor using an appropriate allocation of stocks to bonds (if you work with us, we are having or have had this conversation with you) and assuming you do not need your money for 5 years or more, keep your stock allocation intact.
Even if you are a retired investor you should still stick with your stock allocation as long as you have enough money in your bond bucket to carry you through 5 years of your short-term needs.
To be rewarded by the stock market, we must take the risk that comes with it. With risk comes reward. Stock market investors have ALWAYS been rewarded by staying the course through times like this. As always, we are here to answer your questions and to assess your individual situation. Thank you for your trust and patience.
