Investing in a Time of Plague
Down 3%, down another 3%, up 4%, down another 3%. What is the stock market doing?????? Help!!!!!!
As J. P. Morgan once said, “Stocks will fluctuate.” It’s just more disconcerting when the fluctuation is down and accompanied by scary headlines about disease. We are all going to die – someday – the death rate is still one per customer. But maybe not today, this week, this month, this year. (But don’t go on a cruise ship just now.) And we may be heading into a recession, but that was always going to happen at some point. We’ve historically had a recession every 5-7 years, so one is overdue in that sense. So far, the economy has recovered from all of them.
What does that mean for you as an investor?
The first thing to remember is that if you were working with us, we set an asset allocation strategy with long-term goals in mind and that 2-3 weeks isn’t the long term. If you are still worried, I would contradict common advice and tell you to look at the recent performance of your portfolio. If you are in or near retirement, we would have recommended a balanced portfolio with a substantial allocation to high quality bonds; with the collapse in bond yields the overall bond market index is up about 3% in the past 3 weeks. If you check your account, you should see that it has declined less than the market and that you still have enough money in safe assets to provide for your expenses over the next several years.
Not feeling reassured? Then we need to have a conversation about risk appetite. Risk tolerance isn’t really a rational, calculating equation; it is often an emotional response. You may have felt fine about the risk in your portfolio until the market decided to demonstrate what that risk really means. If that is true about you, you may want to revisit your asset allocation to lower stock market exposure in your long-term targets.
If you are feeling nervous about putting new money into the market, a measured response may help. There are several things to do that may help you feel better:
Make sure you have enough money in safe places like bank accounts and/or money market funds to meet your “extra” cash needs for the next couple of years.
Money you will need in the next 5 years shouldn’t be in the stock market. The US stock market recovered relatively quickly from the last two major declines (bear markets), but nothing in history guarantees that kind of response.
Think about putting money to work more gradually. If you have a lump sum to invest, start with it in a money market account and put it to work over several months rather than all at once. If you are contributing to a retirement plan at work, route new contributions into a stable value alternative for a while. In the long run, that won’t make a lot of difference in your returns. And if feeling less stress helps you stick to a plan, that will make more difference to your end results than missing a few months if the market turns around and goes up again.
If you see a buying opportunity, our counsel would be patience. A 10% decline in market averages shouldn’t be enough to trigger portfolio rebalancing. If the crisis is short-term, the market should rebound and get you back to your target asset allocation. If you “bought on the dip,” you would then be looking at selling stocks and recognizing gains to get back into balance. And if the crisis isn’t short-term, we are looking at a market decline of 25%-30%, so there will be better buying opportunities later.
As the ads for financial products say, always talk to your financial advisor before making an investment decision. If we are your financial advisors, we would be happy to talk with you. If not, we’d like to be. Call 513-794-1829 or email jim@1taxfinancial.com to get started.
Jim Iverson, CFA®