As the Coronavirus spreads, so too do does the fear of what is to come. By now, many of us are seeing real life impacts from the Coronavirus. This may be in the form of having travel plans altered, or maybe you know someone whose school has been closed. President Trump even announced a travel ban to Europe and the NBA has suspended its season.
The stock market has been hit particularly hard over the past month as well. As of the close of the market on Wednesday, the US Market is now down over 15% from the start of the year1 and down nearly 20% from its peak in February.
In times like this, it is not uncommon to feel additional stress and anxiety. No one enjoys seeing declines to their portfolio’s value. Studies have provided evidence that our tolerance for risk is challenged in times like these2. As stress increases, we may be tempted to make financial decisions out of fear. At LFG, we believe that a strong antidote to fear is preparation.
Your financial plan and portfolio strategy have been carefully crafted by your financial advisor in order to be prepared and equipped to endure times like these. And that strategy is informed by facts and observations in capital markets that are worth repeating:
- Markets have recovered from every disruption in the past. The 5-year average annualized return after a 20% market decline is 11.76%3.
- This is not the first time we have seen a market drawdown close to an infectious disease outbreak4. In most cases, we see a recovery within 12 months.
- Downturns are not uncommon over time. On average, we see market corrections of 15% or more once every four years; 20% and greater corrections occur about once every six years5.
- Volatility is part of investing. It is this risk for which we expect to be compensated. We cannot reasonably expect a higher return on stocks (vs. a safer investment like cash) without embracing the reality that stocks have more risk.
- The capital markets are efficient. As the markets get new information, prices adjust accordingly. In this current case, markets are pricing in the impact of short-term disrupted supply chains and lost production associated with the Coronavirus. As that short-term disruption is resolved, prices should also adjust accordingly.
Although it may feel like things are different this time, it is important to remember that the markets have withstood similar circumstances in the past. Valuations of stocks are based upon decades of expected cash flows, not just what we see in the coming months as we deal with the fallout of the Coronavirus.
Many of us vividly remember the Global Financial Crisis from the late 2000s. An investor in an 80% stock/20 bond portfolio6 starting out in 2008 would have lost over 40% of their value by March 2009. By April of 2011, they would have already recovered, and had a positive return.
Obviously, no one has a crystal ball and this message is not meant to imply the market has reached the bottom. But we do believe now presents an opportune time to strategically reposition assets in the market.
Our team is working diligently to keep your portfolio in line with your strategic, long-term allocation by selling the asset classes that become overweight and buying what is underweight. We also are harvesting taxable losses in this process to help lessen your tax burden when you file in 2021.