Staying the Course–COVID-19, Downturns, and Volatility
The COVID-19 outbreak has the attention of the world, with ever-changing news published constantly. Of course, it's not the only event influencing financial markets, which when already weakened can be especially susceptible to more bad news.
What does all this mean for you? Here's some context that we think will be helpful, along with our thoughts on what you should do if you’ve been sitting on the edge of your seat lately.
Two things we know about the market downturn
1. While not predictable in advance, what we’re seeing makes sense at the moment. The stock market is based on the profits of businesses, and events that suggest business will make more or less money cause the value of stocks to increase or decrease. Since markets constantly respond to thousands of different influences, the downturn we’re experiencing is striking, but natural in the circumstances.
2. All businesses can’t remain unprofitable forever. So, in time, the market will recover. No one can say with any accuracy when that will happen, but that doesn’t make it any less inevitable.
Two things we know about investing
1. Short-term volatility is in the nature of the stock market. In fact, if the stock market isn't volatile, something's broken. (When people say they'll get back into stocks when volatility calms down, Ken sometimes jokes, "So, you're never getting back into stocks?")
Swift market drops are not unusual, especially after news that creates uncertainty about the future. The stronger the short-term sentiment, the more extreme the short-term swing. It's easy at such times to get swept up in the fear of the crowd. That’s why it’s so important to remember this next point:
2. If your portfolio is properly balanced, we expect the losses we've seen over the past few weeks to be erased long before you need any of the money you've invested in stocks. Remember, your stock investments are designed to support your long-term objectives: 10, 20, 30, or more years in the future. Stocks are not for today’s or tomorrow’s needs (that’s part of what cash is for).
We're not saying you shouldn't feel what you feel. Of course, the headlines are scary and if you're anxious, please reach out to us so we can discuss what all this means to your unique situation.
Short-term changes are inherently volatile, heavily influenced by headlines and computerized trading. The long-term direction must be inevitably up—just sometimes, you have to wait longer than you might like to see it.
Two things you should do
1. First and foremost: don’t panic.
It's natural to wonder what turbulent times might do to your portfolio, especially with a pandemic that could affect both your health and your finances. And when market corrections occur the media tend to add fuel to the fire. It’s important not to make any alarm-induced moves during a correction. Instead, evaluate the situation rationally and stay the course.
2. If you have questions about your specific situation, please contact us. We may be working from home, but we’re still here. And yes, it's tax filing season, but that doesn't make us too busy to talk with you. One of our most important roles as your trusted advisor is to help you through short-term difficulties so they don’t interfere unduly with your reaping the benefits of a sound, long-term plan.
Two things we know about reaching your goals
1. Success in the stock market is not about winning or losing—it’s about strategic thinking and duration. On any given day, the stock market will continue to do one of three things: go up, go down, or barely budge. Stock market movements are out of our control, just like the coronavirus (on a worldwide scale at least; still, wash your hands!). But our reaction to market volatility is something we can control.
Of course, we understand it’s no fun seeing your portfolio drop. At the same time, we know market volatility is normal and expected, and the resultant losses are temporary. The key is to zoom out and look at the long-term big picture.
2. Significant market drops can create opportunities. This isn’t to say that you should increase how much you intentionally allocate to stocks, but it might be a good idea to rebalance your portfolio, shifting some assets that have gained value into others that have not. There are a few different ways to do this, and it’s a long-term strategy that takes time to bear fruit, but it’s founded on broad economic cycles, not short-term variations. Just don't change your target asset allocation, which we've designed to help you achieve your long-term goals.
There’s one more thing we know: our mission is to help you stop worrying about money. Our prior experience with market downturns gives us reason to believe that sound decision making can lead you to a more confident financial future. As always, let us know what question you have, and thank you for your continued trust and confidence.