THIS SHALL PASS—just not as quickly as any of us would like.
I’m talking about the bear market, but the same sentiment applies to both the coronavirus and the economic slowdown. Indeed, the three are inextricably entwined, with share prices the twitchy indicator that tells us the mood of the moment.
Amid the swirl of news—the latest fatality count, the unemployment claims, the Dow’s daily action—it’s easy to get unnerved and start second-guessing our investment strategy. How can we keep ourselves on the stock market train? Here are four thoughts that I find comforting:
1. We all know it’s bad. The number of COVID-19 deaths has been horrifying, and the forecasts even more so. We’ve also had frightening reports about new jobless claims and the unemployment rate, and every expectation that things will remain grim for many months.
And yet, confronted with all this terrible news, the S&P 500 fell just 34% from peak to trough. That’s far less than the 2000-02’s 49% decline and 2007-09’s 57% plunge. Moreover, since the stock market touched bottom on March 23, it’s recouped more than half of its 34% loss.
How can that possibly be justified? The harsh truth: Investors collectively don’t care about the suffering of everyday citizens, whether here or abroad. Instead, what they care about is corporate earnings and—to judge by the market’s recent performance—investors seem to believe those earnings will recover fairly quickly.
2. Nobody’s perfect. We have just one past, but we face all kinds of possible futures—and we don’t know which one we’ll get. Investors are collectively betting that corporate profits will speedily rebound. But they may be wrong.
My advice: We should manage our portfolios as if we’re profoundly ignorant about the future. That means we shouldn’t put money into stocks that we’ll need to spend in the next five years, lest this decline drags on far longer than imagined. We also shouldn’t bet heavily on any one part of the global stock market, because we don’t know which stocks will shine in the years ahead—and which may never recover from the current economic shutdown.
This measured approach comes at a price: We will be at least partially wrong. We might hold too much in bonds and cash, while also owning parts of the global stock market that generate atrocious performance. But this should not perturb us. Remember, we don’t know which future we will get, so we should build a portfolio where we’ll fare okay, no matter what the months and years ahead bring.
3. Opportunities abound. Even though the S&P 500 is just 15% below its all-time high, many parts of the global stock market are down much more, including smaller U.S. companies, emerging markets and developed foreign markets. The upshot: If investors have cash to put to work in stocks, or they haven’t yet rebalanced their portfolio, there’s still an opportunity to buy shares at reasonable prices.
I would also ponder three other opportunities. First, if you have investments in your taxable account that are below your cost basis, consider taking tax losses. Those losses can be used to offset realized capital gains and up to $3,000 in ordinary income—and any unused losses can be carried over to future years.
Second, consider converting part of your traditional IRA to a Roth IRA. At today’s stock prices, you can convert a larger percentage of your traditional IRA—compared to three months ago—and pay the same tax bill. And, to the extent that today’s depressed prices set us up for higher future returns, those gains in the Roth will be tax-free.
Third, look into refinancing your mortgage. If you have other debt that carries a higher interest rate, you might borrow extra through the refinancing and use the money to pay off this higher-cost debt.
4. It’s not if, but when. Eventually, we will almost certainly have both an effective treatment and a vaccine for the coronavirus. The economy will eventually recover. And those positive developments will be heralded by the stock market returning to new highs.
Yes, there is uncertainty—but the uncertainty isn’t so much about whether all this will happen, but when. As I see it, if investors own a globally diversified stock portfolio, that’s the big risk. Will the recovery take a year, three years or perhaps longer? Given the higher return offered by stocks, a modest delay seems like a small price to pay.
HERE ARE THE SIX other articles published by HumbleDollar this week: