The stock market is down more than 30% from its recent highs of just a month ago, the S&P 500 is having its worst month since 1987, credit markets are not functioning properly and the daily drumbeat of negative news surrounding COVID-19 can be all consuming if you listen to it. Daily moves of 1,000+ points in the Dow in both directions are now common and are likely to continue based on daily news flow.
And it’s going to keep getting worse. We will continue to see confirmed cases of Coronavirus grow exponentially for several more weeks before it starts to plateau and eventually recede. As I am writing this, there are 240,689 total confirmed cases resulting in 9,967 deaths globally. It won’t be long until worldwide cases exceed 1 million. Yesterday I didn’t personally know anyone that has it. I still don’t but I know 3 people that have self-quarantined due to exposure and it sounds like one of them may in fact test positive when the results come back in a couple of days. Sean Payton just confirmed he has it. The point is, this is going to matter to the markets and to your investments until it doesn’t anymore. I don’t know when that will happen. Nobody does. So what should you do?
The first thing I’ll say is the same generic blah blah blah that investment advisors always say: don’t try to time the market, keep a long-term investment perspective and allocate your assets properly given your time horizon and tolerance for risk. There! Feel better? Neither do I. While that all may be good advice, it doesn’t help much when you see the value of your life savings plummeting. I would be remiss in not highlighting just a couple of facts about these statements though before I conclude with more practical and timely ideas that you can implement now even as it feels like the world is coming to an end (which it is not).
Do you think you should sell now and wait for things to stabilize? Check out these charts from Invesco that identify the prospects of successfully timing the market:
Missing just the best 10 days in the market over the last 20 years cut your returns in half and you only had to miss the top 20 to earn less than inflation. In addition to that, the best days in historic returns have often followed the worst. We’ve certainly seen that recently! So trying to time when to get out and get in just doesn’t work.
I like this next chart because it shows that while there have always been reasons not to invest, every generation before us has been able to overcome the challenges we have faced and the long-term investor has always been rewarded by staying the course.
The biggest mistake people can make is panic selling when the market goes down which can lead to a permanent loss of capital. Holding on and not selling when fear is rampant are critical to your financial health. This is assuming you hold a diversified portfolio and are not overly concentrated in a few individual companies or sectors that might not make it.
So what else can you do (other than close your eyes and hold on)? If you are continuously saving for retirement through your employer’s retirement plan, keep doing it! Increase your deferrals if you can. This systematic savings approach is called “dollar cost averaging” where a dollar invested today buys a lot more shares than a dollar invested just a month ago.
This is also a good time to evaluate your overall asset allocation and, depending on your situation, it might make sense to also rebalance your portfolio to “sell the winners, buy the losers” to take advantage of this market correction. If you have a retirement plan through your employer, chances are that you can easily do this on the plan’s website. Talk to your advisor about that.
Another actionable idea that you can take right now during this tumult – consider converting traditional IRA accounts and retirement plan assets to Roth. With asset prices depressed, you can convert now while your account value is lower. Say for example that you had $100,000 in an IRA account just a month ago that is now worth $75,000. Converting that to a Roth account will now cost you 25% less in taxes (silver lining?!). Having money invested in Roth accounts can make a lot of sense as it creates a tax diversification strategy at retirement. Because distributions from Roth accounts are not taxable as long as you follow the rules, converting some of your traditional (taxable) retirement savings to Roth could provide you with more after-tax income in retirement than if all of your money comes from traditional retirement sources. Again, contact your advisor or tax professional to discuss your personal situation.
This is a scary time for sure, but we are going to get through this. The federal government and the federal reserve are both going all in with a double-barreled fiscal and monetary response that is going to include sending checks to people (remember Bernanke’s ‘helicopter money’ statement?) along with multiple industry bailouts. People like buying everything when it is on sale except for stocks. It doesn’t feel good to invest right now and it might go down more – maybe even a lot more – before it goes up again, but the entry point is certainly much more attractive now than it was. Legendary investor Bill Miller said on CNBC on Wednesday “There have been four great buying opportunities in my adult lifetime. The first was in 1973 and ’74, the second was in 1982, the third was in 1987 and the fourth was in 2008 and 2009. And this is the fifth one,” Miller added.
None of this probably matters to you if you are personally impacted by Coronavirus through either illness or job loss. The reality is that most people do not have any form of emergency savings and they are going to struggle mightily through this unprecedented health event turned economic event. If you are fortunate enough to remain healthy and fully employed, please support your local communities! Small businesses need your support more than ever to keep their doors open. Tip the restaurant employee that brings your takeout order to your car a little extra. There are also a lot of good charities out there that will get your donations directly into the hands of those in need.
Please feel free to contact us if you would like to discuss your personal situation or even just to hear reassurance that everything is going to be okay. Our doors will remain open throughout this pandemic (at least virtually), we are here and ready to serve you.
-Scott A. Hayes, CFA
President, CEO of ISC Group, Inc.