The coronavirus pandemic has presented the most challenging environment for investors since the Great Recession more than a decade ago. The Dow Jones Industrial Average just suffered the worst first quarter in its long history, falling by 23% between January 1 and March 31, 2020, to officially enter bear market territory.
Meanwhile, the S&P 500 Index fell 20% during the first quarter, its biggest drop since 2008, while the Nasdaq Composite Index fell by 14% during the quarter. These numbers can be even harder to fathom when you consider that stock market indices were setting new records barely two months ago.
What Should You Do Now?
In the midst of all this volatility and uncertainty, you might be wondering what your investing strategy should be now? For example, should you try to cut your losses by selling stocks held in your portfolio? Should you continue making contributions to your retirement account? And should you actually consider buying more stocks given the drop in stock market prices?
The answers to these questions will be different for each person based on their investing goals, time horizon and risk tolerance. If you’re investing for retirement, for example, your time horizon may be decades down the road. In this case, you’ve probably got plenty of time to make up short-term losses you might incur due to the coronavirus pandemic or other market disruptions.
Risk tolerance has to do with how well you’re able to handle market volatility emotionally. If the recent stock market drops have made you queasy and kept you awake at night, then you may have a low level of risk tolerance. There’s nothing wrong with this — in fact, the volatility we’ve experienced the past couple of months could be a blessing in disguise if it helped reveal your true risk tolerance so you can adjust your portfolio’s asset allocation accordingly.
Keep These Things in Mind
Here are three things to keep in mind as you think about your investing strategy going forward:
- Markets don’t like uncertainty or fear. The stock market plunge has been driven largely by the tremendous uncertainty and fear presented by the coronavirus crisis. This pandemic represents what’s sometimes referred to as a “black swan” event: a once-in-a-generation occurrence that’s massive and destructive and seemingly came out of nowhere.
There is still much we don’t know about the virus and what the economic shutdown it forced will mean to the U.S. economy on a long-term basis. But one thing is for sure: The uncertainty and fear won’t last forever. Clarity and normalcy will return eventually, even if it doesn’t seem that way right now.
- Depressed markets may represent unique investing opportunities. Everyone understands what it means when a store has a sale: Prices of goods are marked down a certain percentage. Well, the stock market is currently having a sale.
Stock prices are down considerably from where they were just a couple of months ago due to coronavirus fears and uncertainty. Investors with a long-term time horizon and the right level of risk tolerance could benefit tremendously from this sale — because history has shown that stock prices tend to rebound over the long term.
For example, the nation was gripped with fear and uncertainty in the aftermath of the 9/11 terrorist attacks and stock markets plunged. Markets also fell steeply during the mortgage meltdown and Great Recession of 2008-2009. Both times, markets recovered relatively quickly and went on to set new records.
- We are currently in the second phase of a likely three-phase crisis. Crises like the coronavirus pandemic often consist of three main phases. The first phase is underreaction, which clearly occurred when news of the virus first emerged here in the U.S. The second phase is overreaction, which many would say is occurring right now with the large segments of the economy shut down due to stay-at-home and shelter-in-place orders in much of the country.
The third phase is rationalism, which will likely arrive in the near- to midterm future. The curve will flatten out. A vaccine and cure will be developed. The economy will reopen. And markets will eventually recover. There’s no guarantee, of course, exactly when these things will happen — but they will happen.
Don’t Hesitate to Contact Us
Perhaps most importantly, it’s critical not to let a crisis or short-term market upheaval disrupt a well-planned financial and investing strategy.
Please feel free to contact us if you would like to talk in more detail about your specific situation. We would be happy to answer your questions and help you devise the best investing strategy for your circumstances going forward.