March 23, 2020

The novel Coronavirus COVID-19 is having an unprecedented effect on almost every aspect of our lives. Today, we are right in the middle of this crisis and life in America has changed dramatically. The danger is real and the media is flooded with all kinds of bad news pumping up the fear factor. So be careful and don’t make any kind of decisions out of fear and panic. It’s hard not to make emotional decisions but try and look at the long term. At this point no one knows how long this will last but we will come out on the other side.

Not surprisingly the financial markets are not doing well. The stock and bond markets do not like uncertainty. This is not the first-time markets have been uncertain. Since I have been investing there have been several scary events that have driven the market down 30% or more. In 1987 the stock market went down 22% in one day.  The most recent was the financial panic that bottomed out with a 50% loss in stock market value on March 9th 2009, so this is not new. There have been many more and they all have the same progression of events. Huge moves down in the stock market due to some financial shock or an external shock like COVID-19. After the huge loss of value in financial assets there is a period of adjustment where people get their bearings and calm down. This is followed by the realization that the world didn’t end and that things will be better. Then, the financial markets recover over a period of time. This time will be no different.

The stock market is a measurement of fear and uncertainty so at times like this of course the market is going to be down substantially. In addition, when news is bad you can always count on the market to overshoot any reasonable valuation on the downside by a mile or two or maybe 100. The lesson of the past is that terrible things happen from time to time but every single time it happens it is a massive buying opportunity for stocks. For those that say this time is different they have always been wrong in the past and they are wrong now.

I don’t know if it will take 3 days, three months or three years but the stock market will recover. Amateur investors will be making a huge and possibly life changing mistake by selling stocks now. Some investors that have been around for a while will not open their brokerage statements and just ride it out. True experienced investors will back up the truck and load up on quality stocks while they are 30% off regular prices. They won’t worry about buying at the exact bottom of the fear curve.

Normal everyday investors that have a plan will be fine. Investors that have blindly been riding the stock market up for the last ten years and may have too much money in the market and now have huge losses that are totally out of their comfort zone are the people most likely to panic.

If you have a plan you will have a target asset allocation which is a mix of stocks and bonds that you feel comfortable with that allows you to meet your investment objectives. It never feels good to lose money but that is part of investing. If you have investments that never lose money you have investments that limit your return potential. If you are correctly positioned in a targeted asset allocation you can sell stocks when they are above your target and buy stocks when the amount of stocks you have is below your target. There is no question about what you should be doing now.