The headlines have been unsettling. “Stocks Plummet, Stock Market Circuit Breakers Triggered, Oil Price War Has Started” were some of top news stories the past few days. Of course, the coronavirus fears are linked as the cause. What should we do now?
Disease outbreaks, including pandemics, run their course. The coronavirus will also run its course, as will its impact on global markets. However, it is human nature for these headlines to cause anxiety and conflict between our two systems of thinking. Our emotional instinct is to feel fear and want to get out of the market now, while our more logical side assures us that we need to stay the course – and in some cases even buy more stocks.
Keeping things in Perspective
Acknowledging the pain is critical as we move forward. The US stock market is down about 19.0% as of March 9 from the all-time high reached only three weeks ago on February 19 as measured by the total return of the Vanguard Total Stock ETF (VTI). It is both the speed and the magnitude of this correction that is so emotionally unsettling.
Providing perspective can help. The record bull market in US large company stocks turned 11 years old today and is still going since we haven’t yet hit a bear market (defined as a drop of 20%). Of course, that could change tomorrow. But even after this correction, the total return of VTI over the past 11 years is 411% or 16% annually.
After long bull markets, it is human nature to expect things to continue and to forget about the short-term risks of investing in stock markets.
Though we suspect volatility will continue for a while, keep in mind that: • Stocks are a 19.0% better buy today than they were on February 19.
• Stock markets will survive the coronavirus.
• Selling after a down market doesn’t work in the long run.
Market Timing in Any Form Doesn’t Work
Leaving the market in response to a crisis is just another form of market timing. There is quite a bit of data indicating that investors, and many advisors, timed the markets poorly during the 2008 financial crisis. The most common mistake was selling at the bottom and waiting too long to reinvest. Keeping in mind the adage “buy low, sell high”, we will be evaluating portfolios for rebalancing opportunities, not because we are making a prediction that stocks will be going up in the short term, but because of our discipline to maintain asset allocation targets for longer term benefit. It is that same disciplined approach that had us rebalance US stocks (sell a portion while the price was high) during this long