There is no understating the impact of the outbreak of the coronavirus across the globe, including here in the United States either as it pertains to health care or the impact on the domestic economy. From their record highs during the latter part of February through midday Friday, stocks have sold off approximately thirteen percent as mostly computerized algorithmic programs have hit levels that have prompted additional selling. We caution investors not to project the carnage of the recent days forward but rather to consider the following.
You either have faith in the benefits of investing or you do not. For the past sixty-five years and over a five year rolling period, a 50/50 weighting between equity and fixed income would never have produced a negative rate of return. Changes in the value of your portfolio should not alter that faith. However, it is not ironic that market downturns challenge the presumption that this fact is predictive of future results. It is also not surprising that the media, in its constant search for “eyeballs” pounces on these stories of lost wealth, knowing that investors tend to get emotionally caught up in their portfolios and end up selling at precisely the wrong time.
Investing is not a static environment. You shouldn’t review your portfolio merely on a quarterly basis. The stock market does not experience volatility merely because it is the end of a quarter. Review your portfolio as the values change or as you experience changes in your life. Given the recent drop, now is the perfect time.
Have a plan to deal with the potential for a negative short-term outcome in a specific investment you have made or perhaps a downdraft in the overall stock market. By nature people are optimistic. We like to think good things will happen to all of our investments. However, as you know, that is not always the case. So have a plan for dealing with a negative outcome. Panic is not a strategy. Assess your situation and develop a sell discipline.
Investors have a tendency to miss opportunities because they remain hostage to past bear markets, especially those of the magnitude of the one a little over a decade ago. Allocate your investments according to your objectives and then as noted above closely monitor that allocation. That is your best chance of success. Otherwise, you’ll be getting 0% to 1% in the bank which also puts your retirement plan and/or retirement income at risk.
There is not problem holding some cash. If you are a bit skittish, a bit conservative or need a level of comfort, keep ten to twenty-five percent of your investment portfolio (this excludes your vacation, rainy day, short-term money) in cash or investment grade bonds. You’ll sleep better at night and who knows, you might be able to put this cash to work at lower market levels.
We believe the negative impact of the coronavirus is somewhat temporary and that the monetary and fiscal responses will be lasting and powerful. That said, as always, we recommend that investors establish a well-designed financial and investment plan. Then, monitor, evaluate and, as necessary, make changes to that plan along the way. This seems logical and simple. However, when fear of monetary loss and emotions get in the way, watch out. That is a certain recipe for buying high and selling low! Avoid this by sticking to your plan and being disciplined.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, please call 518-279-1044.