Look Beyond the Coronavirus Headlines
MONEY TALKS - The spread of the coronavirus has led to an uncertainty being felt around the world, and it is alarming on a human level as well as from a global market perspective. For investors, it can be easy to feel overwhelmed by the constant stream of news about the Market. Being bombarded with data and headlines that negatively frame your financial well-being can evoke strong emotional responses from even the most experienced investors. Fear is a much more powerful emotion than greed, which historically has led markets to drop much faster during tumultuous times than they rise during prosperous periods.
Lessons from the Past - Market declines can occur when investors are forced to reevaluate expectations for the future. Markets respond to new information as it becomes available, but the market is pricing in unknowns, too. As risk increases during a time of heightened uncertainty, so do the returns investors demand for bearing that risk, which pushes prices lower. Our expectation is that investors bearing today’s risk will be compensated with positive expected returns[i]. That’s been a lesson of past health crises such as the SARS pandemic in 2003 and the swine-flu outbreak in 2009. Those crises, along with market disruptions such as the dotcom bubble burst and the global financial crisis of 2008–2009, led to the lost decade of the 2000’s when the S&P 500 ended the decade below where it began.
Avoid Making Changes - Despite what Jim Cramer or other stock market pundits are preaching, history has shown no reliable way to identify a market peak or bottom. During turbulent times it’s easy to lose focus, because it’s often the unknown that keeps investors up at night. Despite these uncertainties, it’s important to avoid making changes based on fear or speculation. Financial science and historical evidence advise against changing course even as difficult and traumatic events transpire. Those investors who held strong in the early 2000’s were rewarded handsomely for their restraint, as U.S. stocks more than tripled from January 2000 to the end of 2019. To put it in perspective, if you invested $10,000 in US stocks in January 2000 and stayed invested, it would be worth approximately $32,400 at the end of 2019[ii].
Patience will be Rewarded - Historically, market gains made during periods of economic expansion have far outpaced losses that occurred during recessions. In fact, after a 20% decline in the market, as we have recently seen in part due to the Coronavirus epidemic, the market has historically delivered an 11.58% annualized return over the next three year period[iii]. One of the most fundamental philosophies of investing revolves around risk vs reward. Now more than ever, it’s important for investors to remember that they are taking on risk by investing in the market. In exchange for this risk, investors expect to be rewarded with positive future returns.
Stick to the Plan - During challenging times it’s more important than ever to stick to the plan. Working with an advisor to develop an Investment Policy Statement, outlining the objectives and philosophies of your portfolio, is a great grounding mechanism to keep you in your seat. Changing course now, unless your personal situation has changed since the outbreak of the Coronavirus, could have negative repercussions for years to come. Remember, it wasn't all that long ago, in Q4 of 2018, that the market was falling nearly 20%. How did it respond? The market rebounded and finished up over 30% in 2019!
[i] https://www.mydimensional.com/the-coronavirus-and-market-declines
[ii] https://www.mydimensional.com/tuning-out-the-noise
[iii] https://www.mydimensional.com/us-equity-returns-following-past-downturns