The ongoing Covid pandemic has reshaped our world unlike any other illness since the 1918 flu epidemic. While the human toll is most tragic, the pandemic has also affected our financial lives in a variety of ways. One of the most notable is the Stock Market. As the pandemic grew, medical professionals and government officials tried to make sense of the limited available data and offer guidance to protect the population. The uncertainty of limited information sent the financial markets quaking. From February 12 to March 23, 2020, the Dow Jones Industrial Average (DJIA) dropped 37%[i]. Many investors reacted with the most basic of human emotions, fear. This fear led some investors to abandon the markets completely and sell all their stocks, mutual funds, and Exchange Traded Funds (ETF). However, markets soon rebounded and any losses were eclipsed by stunning gains through the remainder of 2020 and into 2021. Reviewing this slice of financial history will help us to recalibrate our thinking and avoid the gripping power of fear.
Be willing to accept some loss to avoid greater losses. Instead of a wholesale abandonment of the market, targeted and disciplined sales to reduce stock positions can provide a level of protection for portfolios by reducing risk and increasing conservative holdings. JGUA took this approach in client accounts during market downturns in 1980-82, 1987, 2000-2002, 2007-2009, and the Covid crisis in early 2020. Our analysts continue to closely monitor the market today. This approach, moving clients more conservatively through targeted stock sales, has typically allowed our clients to avoid some of the more extreme swings of the market.
Understand the difference between a paper loss and an actual loss. If I go online this evening and look at my IRA and see that my account is up $100, I’m happy. I made $100. If I look at it tomorrow night and the account is down $200, I’m sad. I’ve lost $200. In reality, I have neither gained nor lost money either of these days. At this point it is only a paper loss or gain. The difference between the money I put into an investment and the money I receive when I close the investment reflects my actual gain or loss.
Put recent events into an historical framework. Since the Stock Market crash of 1929 there have been numerous substantial Stock Market declines. In every one of these declines, the DJIA eventually recovered the lost ground and gained substantially more. History only tells us the past, it cannot predict the future. But history can give us a measure of confidence that investing in stocks for the long term can bring a reasonable expectation of positive returns.
Realize the importance of time horizons for your savings. Some investment options carry more risk (and potentially more reward) than others. The money you’re saving for the down payment for your first home needs a safer investment vehicle than your 401k you won’t touch for 30 years. By carefully reflecting on the purpose of your savings, you can place these dollars in their appropriate place.
Appreciate the importance of proper diversification. Because no one knows which investments will pay off or when, it is wise to spread your investable assets among several options. A well-diversified portfolio can alleviate internal chaos and knee jerk reactions as you see some investments perform better or worse than expected.
Resist the power of fear. There is a wonderful aspect of fear that is essential to human survival. From an early age we learn certain actions will bring pain and suffering and we avoid them. (A select population of three year olds being exceptions to the rule.) But often fear can interfere with our financial goals. The country was in the midst of the Great Depression when Franklin Roosevelt began his first term as President in 1933. The most famous sentence of his Inaugural Address contained the phrase “the only thing we have to fear is fear itself – nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.” This could be the basis of a good dictionary definition of fear. When we give into fear in our financial lives we end up making irrational decisions that cripple our future plans.
No one likes to see negative numbers on a quarterly financial statement. But a period of negative returns is not a reason to panic. Take appropriate, disciplined action, ride out the storm and don’t give into fear.