By Jonathan Freeman, CFP®, CFA, CIMA®
This market downturn happened rapidly. As of just over a month ago, investors were mostly complacent about the risks of COVID-19. After all, recent viruses such as Ebola, MERS, SARS and H1N1 were either quickly contained or had a low death rate, especially in the United States. Each of these impacted global markets, but the effect was minimal compared to the current epidemic.
Fast-forward one month, and the market recorded its fastest-ever 30% drop. Unfortunately, most traditional safe haven asset classes have also fallen dramatically, mainly due to forced selling and a lack of liquidity.
What should investors do now? To use a sports analogy, we need to focus on blocking and tackling. It is critical to get back to the fundamentals of investing. Accordingly, here are a few thoughts for the current environment.
1) Cash Is King
General financial advice is to have three to six months’ worth of spending in checking and savings accounts. In fact, for many retirees, we suggested several years’ worth of very conservative assets, like CDs and treasuries. Of course, the historically low interest rate environment made this difficult for investors, especially as rates dropped dramatically in 2019. However, based on the current environment, with traditionally conservative investments also losing value, people should still have a few months’ worth of cash regardless of the interest rate environment.
2) Don’t Fall in Love With Your Stock
This bear market follows two other major bear markets in 2008-2009 and 2001-2002. Each bear market and recession is different, but the speed of recovery from a bear market has been consistent over time. The only clients who did not fully recover quickly were those who had concentrated positions in stocks within the hardest-hit sectors or those who sold near the bottom of the market. As Financial Advisors, we discourage clients from holding concentrated positions, but we often find that tax ramifications or emotional attachments prevent them from diversifying.
3) Don’t Succumb to Fear
It took years for people who sold their stocks during the last financial crisis to return to a suitable allocation for themselves. They started conservatively but inevitably increased their risk after years of paltry returns on their more conservative investments. Now we are faced with another major market downturn. How will you react?
We are often asked why we wouldn’t sell and simply buy back ten or twenty percent lower. The answer is simple. The bottom typically happens very quickly, and the recovery is just as fast. This recovery begins when fear is at its peak and few investors have the fortitude to buy into this environment. We are better off doing a thorough examination of our portfolios to make sure we own investments that will survive this environment, and then we should ignore the market’s volatility as much as possible.
4) Be Logical and Opportunistic
If investors were willing to accept only a nominal increase in yield for riskier bonds before the bear market, doesn’t it make sense to buy these same bonds now, when they are being priced as if there will inevitably be a massive default rate?
If an investor was watching their favorite technology stock for an opportunity to purchase at a more reasonable price, should a couple quarters of poor earnings or even losses prevent them from buying at a steep discount?
Famous and successful investors like Warren Buffett make most of their money by buying when everyone else is selling. Individual investors, on the other hand, historically perform poorly versus the market averages due to the timing of their investment decisions. We all need to train our minds to think about opportunities during times like this.
We do need to caution you, however, that sometimes chasing after the most beaten-down stocks and bonds does not work. There will be companies that fail, just like during the last two bear markets. So, if you do decide to take advantage of this opportunity, it is important to focus on diversification and sustainability through what might be a challenging economy.
As one of the Directors of Stonebridge Financial Group, Jonathan’s goal is to help lead an organization that strives to provide the highest degree of client service, integrity, and professionalism. With disciplined investment strategies that emphasize risk-adjusted returns, cost, and tax efficiency, his objective is to help the individuals, families, corporations, and nonprofit organizations that he works with to achieve their financial goals.