COVID-19: the Market Gets a Virus

Economy and health care as an economic pandemic fear and coronavirus fears or virus Outbreak and Stock market selling as a stock financial recession concept with 3D illustration elements.

Building a plan, sticking with it still best course of action

Over the past month, global markets have seen rapid declines due to fears about the impact of the coronavirus. Almost everyone is now familiar with the origin and spread of the virus that causes COVID-19, along with the massive efforts to slow its advance. But for those invested in the stock market, the more personal question “How will this impact my future?” is very real. While no one can predict the future, and while each investment situation is unique, we can at least provide a bit of historical context and real numbers that help support a case for maintaining a level head and sturdy hand when it comes to your investments.

Is this unprecedented?
Yes and no. Since 1970, there have been several epidemics with the potential to impact economies, many with a much higher mortality rate than the current pandemic. In some cases, there was a drop in markets, and in others, the market shrugged it off and continued upward. The chart below shows some of those epidemics and the returns 1, 3, and 6-months post-epidemic.

What is unprecedented is the abruptness of this drop, as is the reaction of governments around the world. We have experienced dramatic personal restrictions, as well as some of the largest daily market movements in history, with double-digit percentages being almost commonplace. The market, being an efficient aggregator of current emotions, fears, risks and future possibilities, is incorporating the vast implications of the virus at a rapid clip.

How does this impact me?
That largely depends on how well you prepared. If you have a good financial plan (one that you can stick to) and a well-diversified portfolio, the impact to your planning goals should be minimal. Well-diversified portfolios are designed to withstand volatility and recover from it. That doesn’t mean your portfolio won’t go down in value, but it should help mitigate the more extreme drops. Your plan should already account for short-term spending and withdrawal plans during down markets. If, however, you have a concentrated portfolio of individual stocks or other asset classes and/or a poor plan (or a good plan that you choose to abandon), you will likely experience substantial losses that may never be recovered. These are the real risks of owning a concentrated portfolio of individual stocks or of selling everything during market declines. Unfortunately, this is a lesson that largely seems to resonate only after it’s too late.

No one should invest with the expectation that bear markets or volatility will never strike. You might be surprised to recall that since 2009, the S&P 500 has experienced drops of 5% or more 26 different times, with a variety of concerning headlines to go along with each. Stocks are volatile, and your plan needs to account for that.

What should I do?
The temptation to fret over the drop and impulsively sell your investments will strike early and often. Pessimism and gloomy headlines will continue to dominate the news. While selling everything and sitting on the sideline might feel better in the short term, it is likely to devastate your long-term goals. There is no telling when the market will stop dropping, and often the largest single-day gains in markets come during the most volatile times. Missing out on those large gains has a huge impact on your returns. Your investment plans should not hinge upon successfully timing drops or recoveries in the market, as that has been attempted innumerable times with dismal results.

Instead of retreating from a market downturn, the best course of action is to be proactive within the context of your plan: If you have lots of cash sitting on the side, now is a good opportunity to evaluate how that fits into your long-term goals. Talk with your financial adviser. Look for opportunities in tax-loss harvesting, in rebalancing your portfolio back to target allocations, or in taking advantage of Roth conversions.

Having a disciplined process on which to rely during times of market duress is invaluable. If you don’t have a plan or are feeling lost, seek out a qualified adviser to help you navigate. Build a plan and stick with it; your future is (still) bright.

Nathan Twining, CFP®, is a lead advisor and principal with Financial Plan Inc, in Bellingham. Following his career as a civil engineer, Nathan found fulfillment planning for and serving the financial needs of clients across the country. Distilling complex plans into concise objectives is something of a professional hobby and Nathan is passionate about bringing objectivity, trust, and honesty to the Financial industry. Outside of work, Nathan can be found spending time with his wife and three daughters, golfing, reading, mountain biking or behind the drum kit. He is proud to be a member of Rotary International’s Rotary Club of Bellingham.