Coronavirus Concerns? Consider Past Health Crises
During the last week of February 2020, the S&P 500 lost 11.49% — the worst week for stocks since the 2008 financial crisis — before this note could even be published, March roared in with even worse, one day losses. By all accounts, the drops are largely driven by ever-increasing fears about the potential effects of the coronavirus (COVID-19) and its ultimate impact on the global economy. Although many market observers contend that the market was overvalued and due for a correction anyway, the unpredictability, strength, and suddenness of the historic tumble can be unnerving for even the most seasoned investors. Market volatility tends to cause panic and spark investors to consider cashing out, but it’s always worthwhile to pause and put recent events into perspective, using history as a guide.
A look back
Since the turn of the millennium, the market's negative response to health crises has been relatively short-lived. Approximately six months after early reports of a major outbreak, the S&P 500 has bounced back by an average of 10.47%. After 12 months, it has rebounded by an average of 17.17%. Although there are no guarantees the current situation will follow a similar pattern, it helps to know that over even longer periods of time, stocks typically regain their upward trajectory, helping long-term investors who hold steady to recoup their temporary losses, and go on to pursue their goals.
What should you do?
First, keep in mind that market downturns sometimes offer the chance to pick up potentially invest at value prices, which could position a portfolio well for future growth. Again, there are no guarantees that stocks will perform to anyone's expectations — and decisions could result in losses including a possible loss in principal — but it’s always useful to consider using downturns as opportunities to exercise that age old, wise investment strategy to Buy Low.
Moreover, if you typically invest set amounts into your portfolio at regular intervals — a strategy known as dollar-cost averaging (DCA), which is commonly used in workplace retirement and college saving plans — know that you're utilizing a method of investing that helps you capitalize on value opportunities. Through DCA, your investment dollars purchase fewer shares when prices are high, and more shares when prices drop. Essentially, in a down market, you automatically get to Buy Low. Over extended periods of volatility, DCA can result in a lower average cost for your holdings than the investment's average price over the same time period.
Finally and perhaps most important, during trying times like this, it may help to focus less on daily market swings and more on the fundamentals; that is, review your investment objectives and time horizon, and monitor your asset allocation to check if rebalancing is required. Asset allocation can shift in unexpected ways due to changes in market cycles, so the need to rebalance by selling holdings in one asset class and investing more in another can often arise.
If you have questions and/or concerns about how changing market dynamics are affecting your portfolio, don’t hesitate to call, text or email. We will get through this.
To learn more, contact MNM Vested, LLC.