As the world has dealt with the COVID-19 pandemic over the last several months, we’ve seen an unprecedented impact to global stock markets. The decline in US and foreign equities was surprising in both its severity and speed, with the S&P 500 falling more than 30% in just over a month. This sharp drop from recent highs caused some investors to panic and race for the exits, preferring the safety of cash or treasuries to the volatile stock market. While getting out of the market during a “freefall” might seem like the best move, over the long run it can actually do more harm than good.
Now more than ever it feels like there are plenty of reasons to not invest (or stay invested). The daily news cycle is filled with headlines that illicit fear about the state of the markets and economy, and how this crisis will impact your plans to retire, buy a home, etc. While it is great to be informed about the events of the world around us, over-consuming news can lead to increased stress, worry and poor decision making when it comes to finances. Crises like the one we’re experiencing now cause many investors to react emotionally rather than logically. We see the markets – and our account balances – dropping and feel the need to take action. To truly be a successful long-term investor, it is important to take as much of the emotion out of the equation as possible, which can be very difficult when looking at your life savings. That is why it is so important to work with an investment professional and to have a comprehensive investing plan in place, particularly in times of market turmoil.
Having a stated investment plan can help us focus on the big picture, rather than the day-to-day volatility in the markets. In recent years we’ve seen short-term market fears do long-term damage when clients allow their emotions to get the best of them. This tends to happen when we make long-term investing decisions (e.g. 5+ years) based on events that will correct in a lesser amount of time. Recent examples include:
- US credit being downgraded for the first time ever in 2011. The S&P 500 recovered in around six months.
- The Brexit vote in 2016, from which the S&P 500 recovered in two weeks.
- The trade war with China in 2019, where it took the S&P three months to recover losses.
All of these events had short-term impacts on the markets but caused some investors to make long-term mistakes with their finances.
A more significant example for many investors is the 2008 Financial Crisis, when the S&P lost over 56% between October 2007 and March 2009. It took until March of 2013 – four full years – for the S&P 500 to recover the entirety of those losses. For investors who decided to change their long-term strategy (e.g. going bond- or cash-heavy in lieu of stocks) or, worse, get out of the market altogether, that road to recovery has taken much longer. In some cases, those investors have still not gotten back to pre-crisis levels.
While it would be impossible to predict what specific events will negatively impact the markets in the future, we can say with certainty that these crises will certainly continue. These events may cause your portfolio to decline temporarily, but over the long run they tend to be just a blip on the radar. If you don’t already have a written investment policy statement in place, or if you do and you’ve had trouble sticking to it during times like these, you may benefit from working with an investment advisor. A good advisor will help to create a plan and provide a levelheaded approach to investing, especially during times of crisis.