The last week of February was the worst week for U.S. stock markets since October of 2008 when the financial crisis was starting to take hold. February 27 was the steepest one-day drop for the stock market since 2011 and the Dow Jones Industrial Average suffered losses of more than 1,000 points on two separate days.
All three major U.S. stock indices officially slid into correction territory, dropping by at least 13% from their recent record highs. The main cause of the stock sell-off was growing fears that the coronavirus outbreak will slow global economic growth. Economists have already started to lower their growth forecasts for the year.
Nervousness is Normal
It’s natural to feel a little bit nervous and anxious about personal finances and investments during times of extreme volatility like this. After all, nobody enjoys watching the value of their investment portfolio fall drastically day after day.
However, it’s times like these when it pays to take a step back and put everything in perspective. The stock markets have enjoyed a phenomenal run over the past few years — indeed, over the past decade-plus. The longest running bull market in U.S. history will turn 11 years old this month. During this time, stocks have returned more than 490%, including dividends.
Another point to ponder: The last six times the stock market fell by 3% or more in a single day, the market was higher a month later.
While the daily losses of between 3% and 4% suffered last week were painful, they pale in comparison to Black Monday in October of 1987 when the Dow fell 22.6% in a single day. This remains the largest one-day percentage drop in stock market history. For comparison’s sake, the Dow would have to fall by more than 5,600 points today to equal that one-day loss from a percentage standpoint.
Also remember that the Dow fell 14% the week it reopened after the 9/11 terrorist attacks. By the end of 2001 — or less than four months later — the Dow topped 10,000 for the first time.
Keep a Long-Term Perspective
Of course, none of this is any guarantee that the stock market will rebound quickly from last week’s losses. Past performance, as they say, is no guarantee of future returns.
But if you have a long-term time horizon for your investments, such as retirement, this is no time to panic and sell stocks. History has shown that the stock market provides the highest returns over long periods of time. For example, since its inception in 1926, the S&P 500 has produced annual returns of about 10%. Since 1950, the S&P 500’s annual return has been about 8%.
The Wall Street Journal put it this way in an article published on February 28: “Investors have learned over the past decade that it pays to stay invested in stocks. This mindset has paid off handsomely for those who have used recession scares in 2011, 2015-2016 and 2018 to add to shareholdings at lower prices.”
In fact, selling shares in a panic when the stock market drops could result in the opposite of a successful investing strategy: buying high and selling low. That’s why it’s important to remember that even if your account statement shows an investment loss, you won’t realize this loss unless you sell the investment.
Stick to Your Plan
For most people, the best investing strategy is to create a well-diversified portfolio consisting of the right mix of assets based on risk tolerance and time horizon — and then stick to your plan, regardless of short-term market volatility.
If you have concerns about your investing portfolio in light of the recent market volatility, or if you would like to talk about whether your current asset allocation is appropriate given your risk tolerance and time horizon, please give us a call. We welcome the opportunity to meet with you to discuss your questions and concerns.