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Stand Your Ground

Jonathan Clements  |  February 24, 2020

IMAGINE COVID-19 caused the U.S. economy to shrink 4%. What sort of drop in share prices might this trigger?

As it happens, we already know the answer. Over the 18 months through mid-2009, U.S. inflation-adjusted GDP slipped 4%. Investors—panicked over what the future might bring—drove down the S&P 500 stocks by a jaw-dropping 57%.

In retrospect, this seems like a bit of an overreaction.

To be sure, late 2008 was a wild time. It felt like the global financial system was on the verge of total collapse. Today, we’re dealing with the same sort of uncertainty, only of a different nature. And investors hate uncertainty.

The fact is, nobody knows how widely the coronavirus will spread, how many people will die, how much it will disrupt the global economy or how long it will take to develop an effective vaccine. Trust me: No matter how much you fret over these issues, you will not come up with answers that will help you make more sensible investment decisions. So what should you do? Amid today’s market mayhem, I’d focus on five key points.

First, if history teaches us anything, it’s that great investment gains go to those who are diversified, optimistic and patient. In other words, if you spread your investment bets widely, favor stocks and have a long time horizon, good things should eventually happen.

Second, everyday investors have a huge advantage over the professional investors who dominate the financial markets. It’s those professionals who have been dumping stocks today and snapping up Treasury bonds, so the yield on the 10-year note is on track to finish the trading day at a record low. Why are the pros selling? Because they’re judged on short-term performance.

But you aren’t. You won’t be meeting with clients later this year, who will ask you to justify the investments you own. In fact, the only person who might call you to account is your spouse, and he’s probably clueless. That’s a huge plus: If you’re happy with your portfolio, you can sit tight and wait out the storm, no questions asked.

Third, the only folks who should feel any pressure to sell are those who have money in the stock market that they’ll need to spend in the next five years. If you’re in that camp, you’ve clearly made a mistake by investing short-term money in long-term investments. Should you lighten up tomorrow, next week or next month? I have no clue, because I can’t predict the market’s short-term direction—and nor can anybody else.

Still, things could be far worse. Which brings me to my fourth point: If you do need to sell, you’re likely pocketing handsome gains. As I type this in the middle of Monday’s trading day, the S&P 500 is back to around where it was on Jan. 31. This is not exactly a bloodbath. In fact, the S&P 500 is still up some 380% since the March 2009 market low—and that excludes dividends. Planning to sell? You shouldn’t fret over your market losses. Instead, worry about how much you’ll lose to capital gains taxes.

Finally, if today’s uncertainty over the coronavirus drags on, expect the stock market to overreact, just like it did in 2008 and early 2009. The short-term results will be painful. But the long-run gains will likely be bountiful for those who stand their ground and courageously continue to buy.

Follow Jonathan on Twitter @ClementsMoney and on Facebook. His most recent articles include Four QuestionsRule the RoostNobody Told Me and Great to Gone.

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Brooke
Brooke
1 year ago

Well done, Jonathan. Not sure more can be said.

Langston Holland
Langston Holland
1 year ago

Taking a cue from “The further stocks fall, the shorter investors’ time horizons get.”, I used today’s S&P 500 close for a little perspective. Your time horizon is everything. 🙂

Peter Blanchette
Peter Blanchette
1 year ago

As in life in general it is always best to have a plan. A plan that is consistent with your goals, your resources and your personality. If you have to speak with a professional, speak with a professional. Getting several opinions is better than just one. Stick with the plan because the plan is a plan that has been reasoned through all of the situations one faces(market upturns, market downturns, inflation, deflation, pandemics and all the rest). The plan takes you from 25 thru 75. Why is it that we treat retirement investing as something where we are reinventing the wheel with every twist or turn of the market? If we did this with our jobs, our family, our health, our hobbies etc where would you be? Investing is NOT rocket science. I can say this because I often do not understand what they say on financial shows. With all of the new tools(like index funds and computers) it is a very systematic process. The hardest thing about investing(including procuring the proper amount of insurance) is that we often have much less control over the other aspects of life like our job history, our health, our spouses, our children, the neighborhood we grew up in and being lucky once in awhile. The problem is that many of us try to accumulate as much as possible without taking into account our goals and personality. Being too greedy can cause people to undershoot their goal. People who are unsure of what to do at at a market eruption probably do not have a plan or at least have not thought much about the plan they say they have.

Michael1
Michael1
1 year ago

Great points. Re point 5 – Nearing retirement, and have been mostly putting new money into fixed income and letting its portion of my allocation gradually rise slightly higher than target. Will now use this time to bring the stock portion back up and to do some converting to Roth. I’m sorry the correction is because of a virus, but I’m glad we’re getting one.

Roboticus Aquarius
Roboticus Aquarius
1 year ago

Well said. I guess it was good timing that this weekend I was going over our financials with my wife. She noted our investments were down a bit in January, and I told her that going forward, every year or two there would be a setback where the value of our investments would decline an amount equivalent to the purchase of a new car. Then in a month or 18, whatever, we’d make it back. The numbers get bigger as you get close to retirement, and it helps to be mentally prepared.

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