Two weeks ago, markets hit another all-time high. Today things feel very different. The market has fallen over the past week and it is tempting to do something quickly. It is natural to search for a reason or seek a crystal ball. The popular explanation for the recent decline is the spread of the Coronavirus but nobody knows the exact reason. Maybe there are greater economic issues on the horizon, maybe not. It is not possible for anyone to provide answers on exactly what impact the Coronavirus will have or how the markets will respond.
It’s humbling to consider how, even in 2020, a microscopic virus exposes the fragility of both humans and financial markets (the suffering and loss of life is a tragedy and we certainly don’t want to overlook that, but the focus of this email will be on the financial planning impact).
The past few days have raised many questions, but we think we can boil it down to these two:
- Is this recent volatility normal?
- What adjustments should be made to my portfolio based on what is going on?
We often say that volatility is the price of admission when investing in the stock market. Most people will naturally think of this in terms of the daily fluctuations that are “normal” but view other events, like the current market decline, as something that is atypical of the market and requires action. However, this is exactly the sort of event that we believe is normal when investing over a lifetime. It’s also not the first time the market has had reactions to viruses. Back in 2003 there was the SARS virus and over a 38-day period the S&P 500 index fell by 12.8%. Remember Zika virus at the end of 2015 / early 2016? The S&P 500 index fell by 12.9% during that outbreak. The market recovered from SARS and Zika relatively quickly, but it is impossible to know what will happen this time.1
We continue to believe that successful investors are those who stay with their long-term plan, even during market swings. This is difficult because the market is unpredictable and we, as humans, don’t like not being in control. Making changes to our investments is in our control, but unfortunately making changes during times like this tend to turn out poorly. Consider how difficult this would be to do effectively. First, you become aware of Coronavirus on December 31, 20192. Then you would sit on that information for a month and a half before selling. Then you have to determine which day the market will have bottomed out, and there may be days like a couple of days ago when the pre-market trading is calm, and the market opens higher but returns to losses later in the day. You would have to be right multiple times for this work out. Even if one can predict this specific scenario correctly there will be others in the future, including an election this fall, which will require further prognostication.
It's also worth noting that the news media is not our friend in this process. Remember, these networks need viewers in order to have advertising revenue. They want you to feel like you have to watch and find out how to protect yourself. This isn’t advice, it is entertainment.
We believe the best course of action is to focus on your long-term financial plan. The financial plan was built with an uncertain future in mind. The investment strategy was tailored to support your overall financial plan knowing there would be periods of market volatility and uncertainty. The past week has seen both volatility and uncertainty. This might clear up quickly or it could continue for a while. Focusing on your long-term plan is the best option either way.
Eric and Mike are both in the office and happy to answer any questions or concerns you might have.
1Time to Fear the Coronavirus? Brian Wesbury 2/25/20
2World Health Organization