28 Feb 2020 What Should You Do When the Market Drops?
There are a lot of scary headlines in the news right now. I’ll forgo the commonly accepted blogging practice of listing a few examples here to avoid unnecessarily exposing you to more of them than you are already reading. Along with the scary news headlines we’re experiencing a return of volatility to the stock market. As I write this the S&P 500 has just entered into correction territory – down 10% from it’s record close. While periods of volatility are normal and even necessary for the stock market, let’s be honest, times like this are challenging for all of us.
During times like these we have a tendency to want to take some sort of action. Often it takes the form of wanting to sell the stock in our portfolio with the hope of buying it back after the Coronavirus is no longer in the news. History and academic research have shown us that timing the market is next to impossible and is almost always a bad idea. The fact is that no matter how much you worry over these issues, you won’t come up with answers that will help you make more sensible investment decisions. So, if selling the stock in our portfolio isn’t a prudent move, are there any actions we can take that will not only make us feel better but also improve our financial situation? Certainly, and here’s a list:
- Turn off the TV (at least CNBC.) The previous sentence is a quote from a similar Blog I wrote years ago. It still applies today but I will say that it has become much more difficult to stay pleasantly unplugged (yet prudently informed) with the proliferation of cell phones and social media. Do your best. Maybe delete the CNN app from your phone as a starter.
- Look at your account balance less often. Maybe try for once a month versus once a week, or once a week versus 12 times per day.
- Remember that your portfolio is less volatile than “the Dow,” which consists of only 30 stocks and no bonds, or the S&P 500. It would be more helpful if CNBC would report the financial news based on a 60/40 portfolio (60% stock/40% bonds) which is closer to how many people are invested. The Dow and S&P 500 are now 12.1% off their highs, our clients in our 60%/40% model portfolios are down an average of 6.1%. The reason is that our 40% component invested in US Treasurys, our insurance against market volatility, is up 2.2%, offsetting stocks’ declines.
- Consider how history can be instructive. While past performance is not a guarantee of future results, it can be helpful to see how efficient portfolios react both during unsettled markets and after. Click to see how the indexes comprising our model portfolios did during the Great Recession. 1 Notice how similar the returns are over the period labeled Great Recession Market Impact Return (10/1/2007 – 3/31/2019). A 90% stock portfolio (B90) has not performed much better, on average, than a 45% stock portfolio, over the last 12 years.
- Rebalance your portfolio. Considering the run-up the stock market has experienced over the last several years, there’s a good chance that stocks make up a larger percentage of your portfolio than you intended. Selling some of your stocks to bring your portfolio back to its intended allocation will ensure that you’re not exposing yourself to more risk than is necessary. Plus it’s a natural way to buy low and sell high and take advantage of drops in the market.
- Make a plan to put cash to work. Warren Buffett once said that as an investor, it is wise to be “fearful when others are greedy and greedy when others are fearful.” If you have a chunk of cash you’ve been waiting to invest perhaps now would be a good time to consider doing so. If this seems daunting to you, it might make it easier to stomach if you systematically stage your cash into the market over a period of time. For the record, this is not investment advice. Please consult with your financial advisor before undertaking such a plan.
- Have a financial plan and investment strategy and stick with it. Odds are the current market volatility hasn’t changed the long-term probability of accomplishing your dreams and goals.
- Remember the wisdom of Ben Graham, the father of fundamental investing. The market is a voting machine in the short run and a weighing machine in the long run. Click here to read more on the topic.
- Remind yourself that short-term outcomes are not the same as long-term success.
- Give your advisor a call. At Beacon, we’re just a phone call away and we’d be happy to talk through any questions you might have.
If you’re a Beacon client you can be sure that we will continue to stay informed for you and alert you to any necessary changes to your plan or portfolio. In the meantime, please let us know if you’d like to have a conversation about how times of potential market volatility might impact your portfolio.
1 Actual Beacon portfolios are invested in VTI, VEU, and IEF, Exchange Traded Funds that closely mirror the indexes performance and are charged fees for planning and management, which are not reflected in returns represented in the chart.