The global financial markets have taken a dip this week over fears about the spreading coronavirus, erasing gains from earlier this year. Investors are understandably nervous about their money and their health, and if you are worried about your portfolio, you’re not alone. But during stock market volatility, it’s important to keep a level head to avoid financial mistakes.
At times like these, it’s important to put current conditions into perspective. This is not the first time the market has taken a tumble, and it won’t be the last. Declines in the markets are fairly regular events. In fact, drops of 10% or more happen about once a year on average, which is illustrated on the following chart.
Keep An Eye On The Situation
We simply do not have enough information yet to know how the coronavirus will impact the economy in the short- and long-term. It’s possible that the virus will soon be well-contained and the markets will recover. But it is also possible that the virus will continue to spread, which could lead to further market declines or even a longer-term recession.
It’s important to remember that markets dislike uncertainty. With so much uncertainty over how fast the virus could spread and the potential impacts, volatility right now is extreme. As we get more information, it is likely that day-to-day market fluctuations will decrease. However, it’s impossible to predict how quickly that uncertainty will diminish, and many experts predict the spread of the virus will get worse before it gets better.
The potential impact of the coronavirus could be roughly estimated by looking back at similar viral outbreaks. Over the two months following the 2003 SARS outbreak (a previous strain of the coronavirus), the S&P 500 index fell 14%. However, one year later the S&P was up nearly 21%. Other outbreaks saw initial downturns of 5.5% to 7%, such as the Avian flu in 2006, the Swine flu in 2009, the Ebola virus in 2014, and the Zika epidemic in 2016. But one year later, the market recovery was between 10% and 36% for each of those events.
There’s an old saying that the best thing to do when you meet a bear market is the same as if you were to meet a bear in the woods: play dead. While easier said than done, successful long-term investors know that it’s important to stay calm during a market correction. We don’t know yet whether the coronavirus fears will translate into an official correction, but the risk always exists. The reality is that US broad market indexes are priced comparably to where they were in August 2019 – when they were making all-time highs.
Market volatility has increased in recent years, and the media can often make it seem like each episode is worse than the one before. In reality, volatility does not hurt investors, but selling when the market is down will lock in losses. Those who are contributing regularly to their investments benefit from this volatility, allowing them to buy more shares at lower prices.
Remember That Your Portfolio is Diversified
We understand that volatility and market declines are stressful. However, we encourage you to keep in mind that while the stock market may be down, your portfolio is made up of tens of thousands of stocks, bonds, and other assets that are designed to work together to somewhat smooth out volatility.
It’s important to consider your overall portfolio, time horizon, goals, and objectives when reflecting on economic events. If your goals, risk tolerance, and time horizon haven’t changed, then likely no significant changes are necessary, although you may see adjustments to your portfolio to keep your investments relatively in balance. And as always, please reach out to us if you have any questions or concerns.
Speak With Your Advisor
Whether you’re new to investing or an experienced investor, it’s helpful to consult with an objective third party. Human nature causes us all to act out of emotion when our accounts go down since we tend to feel the pain of loss twice as strongly as the joy of gain. As an independent firm and fiduciary, we put your interests first. We seek to serve as a support system for our clients, helping them make informed financial decisions that aren’t driven solely by emotion.
We’re Here for Your Friends and Family
If you have friends or family who are concerned if they are still on track, we are happy to offer a complimentary meeting to discuss their situation and determine how we can best help. We can discuss what is appropriate for their immediate needs and long-term objectives. Sometimes, simply speaking with a financial advisor may help investors feel more confident about what they are doing and the actions that they can control and less concerned with the day-to-day market activity.