Keep calm and don’t cash out of your stock holdings.
Over the past few weeks, it’s no secret that we’ve seen large swings in the stock market. It’s also no surprise that these swings have been largely driven by the constant fear of COVID-19’s impact on the global economy. Although market observers have previously stated the market was overvalued and due for correction anyway, the unpredictability, strength and suddenness of this tumble has left even the most seasoned of investors with coronavirus concerns.
If recent volatility is causing you to consider cashing out of your stock holdings, it may be worthwhile to pause and put recent events into perspective, using history as a guide.
Since the turn of the millennium, the market’s negative response to health crises have been relatively short-lived. The table below shows the S&P 500 bouncing back at an average of 10.47% six months after early reports of a major outbreak. After 12 months, it rebounded by an average of 17.17%. Although there are no guarantees that the market will follow a similar pattern in this situation, it may be reassuring to know that over longer periods of time stocks regain their upward trajectory. This helps long-term investors who hold steady recoup their temporary losses, catch their breath, and continue to pursue their goals.
With those statistics to consider, there are also three things to keep in mind as we work through the stability of the current market.
Market downturns could offer the chance to pick up potentially solid stocks at value prices.
Before you consider cashing out, keep this in mind. Picking up these stocks during market downturns could better position your portfolio for future growth. Again, there are no guarantees that the stocks will perform to anyone’s expectations and the results could include losses including losses in principal– but it may be helpful to remember that some investors use downturns as opportunities to buy what were previously overvalued stocks that are relative to their perceived earnings potential.
Investing set amounts into your profile at regular intervals will result in similar behaviors as the investors noted above.
This is a strategy known as dollar-cost average (DCA) and is commonly used in workplace retirement plans and college investment plans. Through this strategy, your investment dollars purchase fewer shares when prices are high and more shares when your prices drop. In a down market, you automatically “buy low,” which is one of the most fundamental investment tenets. Over extended periods of volitality, DCA can result in a lower average cost of your holdings than the investment’s average price over the same period.
Focus less on daily market swings and more on the fundamentals.
Take time to review your investment objectives, time horizon, and revisit your asset allocation to ensure it’s still appropriate for your needs. This is perhaps the most important focus while experiencing coronavirus concerns and trying times for the market in general. Your allocation can shift in unexpected ways due to changes in market cycles, so you may discover the need to re-balance your allocation by selling holdings in one asset class and investing more in another. (Always consider that re-balancing in a taxable account can result in income tax consequences.)
If coronavirus concerns are still leaving you to question how to market cycle changes are affecting your portfolio, contact your financial professional. Often a third-party perspective can alleviate any worries you may still hold.
Ryan McDaniel is a Certified Financial Planner and is a financial advisor at EM Ford. With ten years of experience in the industry, Ryan specializes in retirement planning, navigating his clients through this process seamlessly and ensuring financial preparedness. Outside of retirement planning, Ryan is an expert in the field and helps his clients prepare and protect their future while also planning for life's uncertainties. Contact Ryan at firstname.lastname@example.org to learn how he can help your pursue your financial goals.