AMID THE PAST WEEK’S stock market downturn, many people are asking two questions:
“How bad will it get?”
“How long will it last?”
I can’t answer these two questions, and nor can anybody else. But I have an answer to a third question: “What should I do?” Below are seven thoughts:
1. Ask financial advisors what they recommend at a time like this and most will offer the same advice: “Don’t panic.” While I agree, that doesn’t mean there’s nothing you can do.
It’s easy to have become complacent, especially after the long bull market that we’ve enjoyed, so I would use this decline as an opportunity to stress-test your investment strategy. What would the impact be if the stock market continued going down from here? Between 2000 and 2002, and again between 2007 and 2009, U.S. shares lost about half of their value. If that happened again, what would it mean for your financial goals—and your state of mind?
2. If, after conducting a stress test, you determine you’re taking too much risk, you shouldn’t feel like it’s too late to make a change. If you sell some stocks now, you aren’t violating any investment dictum against selling low. Far from it. Though the S&P 500 is down 13% from its high last week, it’s still 5% above where it stood a year ago.
3. This period of market turmoil also provides an opportunity to observe the power of diversification in action. You can see it at two levels. First, the performance of bonds over the past week illustrates why they are, in my view, the most effective tool for diversification. Though the yields are paltry, and in some cases no better than a savings account, bonds can do something that cash can’t: They can rise in value. Over the past seven trading days, while the S&P 500 has lost 13%, an index of intermediate-term Treasury bonds has gained 2%.
Second, you can see the importance of diversification within the stock market. So far in 2020, the S&P 500 is down almost 9%, but there’s a lot going on within that 9%. Among the 11 industries that make up the S&P 500, some are faring much better than others. Utilities, real estate and technology stocks have experienced only modest declines, while energy companies have suffered wrenching losses. This is why I always recommend owning both stocks and bonds, and why I think the best stock market investments are total market index funds, because you get exposure to all 11 industries.
4. If you’re still in your working years, and saving from every paycheck, recent events shouldn’t bother you. In fact, counterintuitive as it may seem, you should view the market drop as a positive development. While you no doubt hate to see your portfolio’s value decline, market downturns can end up bolstering your wealth if you’re a net saver. In fact, if you’re early in your career, you should hope for a prolonged stock market downturn, so you can invest a heap of money at cheaper prices.
5. Many of the headlines I’ve seen this week have been in ALL CAPS, with all kinds of dramatic statements: markets tumble, pandemic risk rises, fastest decline ever, yields collapse and more. If you’re reading these headlines, recognize that news organizations don’t gain readers by speaking calmly. Also keep in mind the classic study demonstrating that more information doesn’t necessarily lead to better decisions. The bottom line: Don’t feel there’s any need to follow the news 24/7.
6. A few weeks back, I talked about the danger of narratives. People love to tell stories, because they’re more interesting and easier to remember than facts and figures. That’s especially true at times like this. The coronavirus is new and not yet well understood, so everybody can paint their own picture, without much fear of contradiction.
Some are pointing out that the coronavirus is far less deadly than the flu that comes around every year, while others are focusing on the higher mortality rate. Some say this couldn’t possibly be as bad as the 1918 Spanish flu pandemic because medical care is now better, while others counter that air travel—which has more than doubled over the past 15 years—causes disease to spread more widely. My advice: Beware of all these stories. While there’s a kernel of truth in each of them, no one can gauge exactly what impact the coronavirus will have on the global economy or on financial markets.
7. While we don’t know how bad things will get with the coronavirus, I recommend consulting past stock market downturns to get a sense for the potential investment impact. Here’s what history tells us: Since the Second World War, there have been 12 bear markets resulting in market losses averaging 32.5%. From the market bottom, it has, on average, taken just two years for the stock market to recover. Right now, the stock market’s decline seems scary. My advice: Strive to maintain some perspective.
Adam M. Grossman’s previous articles include Don’t Tinker, Adding the Minuses and Believe It or Not. Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter @AdamMGrossman.