In trying to stop the spread of the COVID-19 virus, we are waging a war with an invisible and unrelenting enemy: a microscopic pathogen. But that is not the only invisible enemy we are dealing with. We are also in a struggle against another sinister foe: a pandemic of fear.
Nowhere is this fear more apparent than in the financial markets. We were on the cusp of passing 30,000 on the Dow Jones Industrial Average (DJIA) the week before the news circulated that the coronavirus had spread beyond China. Two weeks later, the DJIA had lost more than a third of its value as it descended past the 20,000 level. Other indices in the domestic and foreign markets declined similarly. These precipitous drops, representing trillions of dollars of lost economic value, are the manifestation of investor fear, uncertainty and doubt.
This type of fallout is not new. In the past ten years alone, we have seen several severe and sudden market declines and their subsequent resurgence. Among the most recent: the Flash-Crash of 2010, the U.S. credit quality downgrade in 2011, the Greek debt crisis in 2013, the Ebola outbreak impact in 2014, the Dow’s first ever 1,000 point fall in 2015, Brexit in 2016, a record DJIA decline of 1,175 points in 2018. All have been the by-product of runaway fear and a crisis of confidence.
Despite what at the time seemed like entirely new and uniquely devastating circumstances, the markets recovered time and time again. Gradually, fear gave way to reason and rationality and the problems that seemed so insuperable melted away as we chiseled at the roadblocks to recovery. And, although these market declines had been sparked by entirely different causes, they all shared similar characteristics and patterns.
The hero’s journey
Behavioral science tells us that many people feel driven in times of upheaval to “do something.” They find it unbearable to sit and watch their investments lose value without acting. Their tendency is to sell their holdings to prevent their accounts from taking on more losses. But such an emotional response can be costly. Selling into a declining market makes the losses permanent and “spooked” investors shy away from participating in the markets at all. Many investors never returned to the stock market after the financial crisis of 2008, missing out on over 400 percent returns in the following decade.
Now is a good time to remind ourselves that in the short-term the financial markets are a barometer of confidence, whereas in the long-term, they tend to follow the trend of increasing corporate earnings.
Consider the following:
Take this opportunity … An undervalued market is a great opportunity to defer income into your employer-provided retirement plan. If you haven’t contributed to your company 401(k) account, start now. If you are a regular contributor, unless you need the cash for someone in your family who has suffered a hardship, such as a job loss or increased or unforeseen expenses, consider increasing your contributions.
Review your Investments … If you are in an investment program such as a Target Date Fund or a Risk-Based Model, it is likely that a financial professional is making the investment decisions for your account. But if you are a do-it-yourselfer and have created your own investment mix, now might be a good time to ensure you have a diversified blend of investments categories, or asset classes, in your account and that you have the correct amount of growth investments, that is, stocks or equities, relative to safer investments like bonds and cash.
Rebalance your investments … Your retirement plan account can probably be automatically rebalanced to restore it to its original asset allocation—that is, the proportion of stocks to bonds and cash. Generally, the growth investments over time tend to advance faster than the safer investments, so the allocation tends to skew towards more aggressive investments if left unattended. You can set up your account to rebalance regularly, say, on an annual basis, but even quarterly or semi-annually if you prefer. You can also do it manually from time to time. These periods of significant market turmoil can be good opportunities to rebalance manually.
Seek wise counsel … It never hurts to get a second opinion—or a first one, for that matter. Make use of the investment advisor associated with your employer’s plan and have them review your investments with you. Ask plenty of questions until you feel comfortable that what you are invested in is appropriate for your needs, goals and financial condition. If you work with an investment professional, consult with them as well. Make sure that whoever you talk to understands your complete financial picture and is committed to acting in your best interests.
So, if you feel compelled to act, these are things you can—and most likely should—do during these times or any times marked by turmoil in the financial markets.
Stay safe, stay healthy and keeping washing your hands!
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