I’m sure you’ve seen the headlines, but if not, you should know that the global stock markets are dropping as a result of fears about the spread of the coronavirus.
We have no idea how far or fast the disease will spread, and neither do the markets. The first 3% drop in the U.S. stock markets was utterly unexpected, and nobody could predict the declines that followed. The S&P 500 is now down -7.6% from the end of last year and has crossed into correction territory, which means it is down more than -10% from its’ previous high. It is important to remember that your portfolios could look very different than the “market” that the pundits on television speak about, and you may have experienced different performance than they are reporting.
What is the best course of action today? The options now are:
A) Sell today, and then watch to see how the spread of the coronavirus plays out in the minds of day traders and quick-twitch “investors.” The odds are that the markets will recover before the end of the epidemic, so you’ll eventually have to buy back at a higher price than you sold.
The chart below gives you an idea of how frequent these kinds of pullbacks are:
B) Wait until there is confirmation that we are, indeed, in a real bear market, sell at or near the bottom, and then see the markets rise past where you sold.
This chart shows that you can have significant downturns and significant returns in the same year:
C) Hold tight, ride out the downturn (however long or short it might be), and experience the next rise (whenever it comes) and breathe a sigh of relief that the markets were not down permanently for the first time in human history. You’ll do some sweating along the way, but in the end, you’ll look like a winner.
We can see that the corrections all take on a bit of a different character, but they all have one thing in common, they end:
I know hearing us tell you to stay the course and not abandon your long-term goals and strategies goes against everything your heart and brain are telling you to do. Market timing during times of market stress is psychologically appealing, but in the real world, it is pretty much impossible to execute. Not knowing when to get out (Yesterday? Two days ago?) and especially not knowing when to get back in, means that your odds of getting it right twice are about 25% or less—and remember that you already missed the first timing decision.
So in the real, rational world, you have only two reasonable choices: ride it out (and know things could get worse before they get better) or contact our offices if you are feeling real mental distress over these days of downturns. It could mean that you need a permanent reduction in your portfolio’s risk profile before you make a mistake, out of fear, that could cripple your financial future. Remember, panic is not a strategy. If we feel there is a change in your portfolio that could increase your chances of long-term success, rest assured we will be giving you a call.
Jonathan A. Murdock
Opinions expressed are those of Jonathan Murdock and not necessarily those of RJFS or Raymond James. All opinions are as of this date and are subject to change without notice.
THIS MATERIAL IS FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE USED OR CONSTRUED AS A RECOMMENDATION REGARDING ANY SECURITY OUTSIDE OF A MANAGED ACCOUNT.
There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance is not indicative of future results. Asset allocation and diversification do not ensure a profit or protect against a loss.
There is no assurance that any investment strategy will be successful or that any securities transaction, holdings, sectors or allocations discussed will be profitable. It should not be assumed that any investment recommendation or decisions made in the future will be profitable or will equal any investment performance discussed herein. Investing involves risk, including loss.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. An individual cannot invest directly in an index.