As a group, our clients have done a great job of evaluating this recent market downturn as an opportunity rather than a disadvantage. Our advisors are receiving more calls about adding new money to portfolios (more specifically to equities) than calls to sell, but for those who don’t share the same sentiment, I don’t want to minimize your concerns or feelings. So, let’s talk through what is happening.
The US stock market declined 10%, which just happens to be the largest one-day drop since the Black Monday of 1987 (-23%). The coronavirus continues to foster uncertainty in the global economy and the news of travel restrictions and cancellations of sporting events, such as the NCAA March Madness, have elevated concerns to what may feel to some as uncharted territory. So, let’s revisit history.
Our nation has faced AIDs, SARS, the Cold War, World Wars, hurricanes, and presidential assassinations. It’s hard to deny the pain caused by each of these events, yet our economy has never failed to push forward. We don’t need to have 20/20 vision to be successful investors. We don’t need to have answers to the questions “When will the market bottom?” “How long will this pandemic last?” and “What will happen to GDP?” What we need is to tap the rational side of our thought formation and recognize that, in time, this too shall pass.
According to Ned Davis Research, this is the twenty-fifth 20% decline in the US stock market as measured by the S&P 500 since 1926. Which means, as severe as the whiplash has been, it is more common than we realize. As Exhibit I illustrates, after a fall of 20%, stock returns averaged over 11% the following decade.
We need to understand that with or without the virus, consumers continue to need goods and services for daily living. These goods and services are provided by global companies and owning a piece of the global economy through stocks has been—and will continue to be—the best method to create income and build wealth. You won’t find catchy teasers coming from us like the one I saw on Yahoo: “3 Rules for Investing in a Volatile Market.” Unfortunately, we can’t summarize market turmoil into a simple solution. What we have done for our clients is build diversified portfolios that will allow them to weather this market decline, just like in 2008, 2000, 1990, and 1987.
If you are part of the group that sees opportunity and have additional funds sitting idle, now may be the time to make additional investments. If you are part of the group that is nervous and concerned, remember your portfolio has both stocks and bonds. Bonds are your ballast and provide cash flow and liquidity. They are your “safe bucket” of wealth. Whether you have new money or are uncertain about your existing strategy, we encourage you to contact your advisor.
In closing, our recommendation is to stay the course and, where appropriate, continue rebalancing the portfolio to take advantage of opportunities. Warren Buffet once said, “We simply attempt to be fearful when others are greedy and to be greedy when others are fearful.”
Until then, live life well and know we are here if you need us.
Ty Haberling, CFP®
PS: If you have a friend that is ringing the panic button, have them give us a call.