Covid and the Stock Market
Covid and the Stock Market
As I’m sure most of our readers are aware, the stock market has undergone an extremely rapid correction and continued to fall over concerns about the COVID-19 virus. Generally, corrections of this magnitude happen every year or two due to economic factors or just normal adjustment to company earnings and domestic growth. However, this situation is a bit different, since the threat of a global pandemic goes far behind the normal and predictable pattern of market changes. The primary concern for most people is of course the safety of their loved ones. From an investment standpoint, the threat to the market is primarily the disruption of manufacturing in China, business closings, and quarantines. While the depth and severity of these corrections may vary, there is no question that these concerns will run their course, and the markets will stabilize. It’s extremely important that everyone sticks to their investment plans during this time, and remember they are investing for a future date, not for today. If you’re uncomfortable with the volatility of the markets over the past couple of weeks, its important to work with your adviser on a portfolio that is appropriate for your needs and makes you comfortable, even when the market is swinging dramatically.
During market corrections, one of our jobs at Arrow is to alleviate the concerns of our clients, and make sure they stick to their plans. The vast majority of people who under-perform the market and/or lose significant amounts of money during a correction fall into one of the following two camps:
1.) People who panic sell. Selling in a panic during a correction is almost never the correct choice. Not only do investors lock in their losses, but they lose all of their dividends and interest payments as they move into cash. Always call your financial planner before making any type of impulse decision. A huge portion of annual gains in investment portfolios is due to a handful of extremely large upward swings in the market. If you miss these swings, you will significantly lag the potential gain in your portfolio.
2.) People that try and time the market. It is also never a good idea to try and time the market, particularly during increased periods of volatility. Timing the market is notoriously difficult, and most professional investors can’t do it. It’s the reason why greater than 90% people that try day trading lose money. It’s a difficult task because you need to guess correctly twice. First on when to sell. Secondly, on when to re-enter a position. To complicate matters the average investor has less tools and information at their disposal compared to professionals, and is even more likely to get a very poor price when trying to time market swings. Just being wrong one time can lead to huge losses and erase all of your previous progress.
So what should you do?
This is the hardest part. Stick to your plan. Don’t panic. The vast majority of our clients have no reason to make any changes to their portfolio because of the Coronavirus. In both 2011 and 2018 the stock market fell by just over 19%, and those corrections quickly reversed and the market recovered. We agree with most financial professionals that suggest when the virus is under control, markets will return to normal. However, its important that you evaluate your risk tolerance at times like this. Are you OK with having a large exposure to stock when 20% swings occur every few years? If not, you should work with your adviser to change your allocation to properly reflect your needs.