We always tout one of the benefits of having an advisor is the ability to talk to a cool head during times of crisis. Well, that time has arrived, and naturally our advisors have been getting a ton of concerned questions about the Coronavirus and market decline.
We realize many of you have these or similar questions, so we wanted to share our answers to some of the most frequent our advisor team is receiving right now.
In the interest of being as authentic as possible, we used excerpts taken from actual emails with current and prospective clients, minus any personal information that could identify the person asking the question to protect the innocent.
If you recognize one of these responses as something that has been in your inbox – take it as a compliment. You asked the questions everyone else wanted to but may have been afraid to ask, and now everyone else can benefit!
Where will the market go from here? Can we expect a quick recovery?
“I’m hoping for (a recovery) too, and I wouldn’t be surprised if it happens, but I’m also willing to admit I can’t predict how things will pan out over the next few months. It all depends on what new information comes out and whether that’s better or worse than what the market has already accounted for.
At the very least, I think it’s important to be mentally prepared for the market to be extra volatile for a while. It’s also important to be mentally prepared for the possibility that things may get worse before they get better.
The good news is eventually, they will get better. I always tell clients, ‘I can’t tell you WHEN or HOW things will get better, only that they WILL get better eventually.’ We just have to stay invested until that happens. But, I recognize that’s a lot easier said than done sometimes.
I think your approach of not looking at the day-to-day numbers is the best course of action during times like this. Checking account balances frequently when the market is fluctuating wildly only increases stress and has no practical benefit.
I appreciate you placing your trust in us and for hanging in there. As my dad always says, ‘This too shall pass.’”
Do I need to be worried about any of these drastic dips?
“Long story short, no. Historically speaking, you’d expect to see a 5% decline about three times a year, a 15% decline once a year on average, and a decline of 20% or more every 5 years or so on average.*
So these things are normal, and I was thinking yesterday how I appreciate the volatility of the stock market, because if there weren’t premium fluctuation in the short term, then there would be no premium return in the long run, which we need to retire successfully. I can’t say when, but this will pass as it always does.
Will the decline get worse before it gets better? Maybe, maybe not, but all I know is it will get better if history is any guide, and it’s the only guide we have.
So the only thing we can do is sit tight, stay with our appropriate allocation to achieve our goals, and ride out the ever so passing storms and wait for the sunny days ahead.
The alternative would be to try to time the market and get out while it’s scary and jump back in whenever it’s ‘good,’ but we know that can’t be done with any consistency, and it has always proven to be a failing strategy.”
Should we sell stocks and move to cash?
“It’s easy for me to place trades to put it in cash, but I would strongly discourage you from doing that (unless you need to withdraw the money for some purpose).
I totally understand having concerns with all the craziness going on with COVID and the market…we’ve had a few other clients express a similar desire to go to cash or bonds (typically until things “get better”), so you’re definitely not alone.
However, that’s not a strategy I ever recommend because it pretty much always ends poorly. There was actually a great article about the problems with that approach in Forbes recently that I highly encourage you to read: https://www-forbes-com.cdn.ampproject.org/c/s/www.forbes.com/sites/kristinmckenna/2020/03/11/should-you-go-to-cash-until-the-market-recovers-or-ride-it-out/amp/
Long story short, going to cash after a 30% decline in the stock market would result in turning a temporary decline into a permanent loss. You’ve already experienced the “risk” side of investing so you might as well stick around for the long-term reward.
I can’t tell you when or how things will get better, but if history is any guide, things WILL eventually get better and this decline will be temporary (like every decline before it). I’m not saying things won’t fall further from here (they may or may not). Unfortunately, it’s impossible to predict where things will bottom out, so if we sell now, there’s an extremely high chance that we miss a good portion of the recovery, which would cause permanent financial damage. Part of this is because the market can shoot up quickly after major declines and it usually happens well before things start to look better. This is exactly what happened in 2009 as the market shot up like a rocket long before things looked like they were improving. The people who went to cash in 2008/2009 did permanent financial damage they’ll never recover from.
Your current target investment allocation is 60% stock / 40% bonds. The actual allocation has drifted to about 52% stock due to the stock portion declining. Our standard process would be to rebalance back to your starting allocation and that would be my recommendation.
At the very least, I would keep things as-is and continue to use future contributions to rebalance gradually over time. If the market falls further from here, we’ll keep using your monthly contributions to buy at lower prices. I know the decline doesn’t feel great, but it is actually a good thing for future contributions since we’ll be buying shares in the stock funds within the account 30% cheaper than we were a month ago.
There’s a very high chance it will end up being a huge financial mistake to go to cash now, even if the market falls further from here and it looks like the “right” move temporarily. If we were to go to cash, we would immediately be faced with the issue of deciding when to buy back in, which we will inevitably get less than perfect and cause disappointment. We just don't believe that timing the market like this can be done successfully, and never attempt to do so."
Is now a good time to invest?
“The textbook answer is that it is always the right time to invest money (provided it’s not needed in the next 5 years) because we can never time the market consistently over time. About 55% of the time, the market closes up, so it’s virtually a coin toss.
Given that we’re in a 30% decline (or so) your dollars are buying more shares than they previously could. As long as you believe the stock market will eventually rebound (as we do strongly) then yes, I would give serious consideration to taking advantage of this temporary sale.”
Is it time to switch my allocation to more stocks?
We are somewhat “buying into the market” when we rebalance since I sold from the fixed income portion (which was overweight) and used the proceeds to buy the stock funds in order to get you back up to our target of 60% stock / 40% bonds.
If you have extra cash, times like this will ultimately end up being a great buying opportunity even if the market falls further initially.
If you’re talking in terms of increasing your stock allocation, I would only recommend that if you wanted to stay there permanently (not as a market timing call).
For example, if you said you wanted to move up to a target allocation of 70% stocks / 30% bonds permanently because it will ultimately lead to a larger inheritance/more charitable giving, that would be reasonable as long as you’re comfortable with the extra risk that comes along with that.
Whether we’re investing cash or increasing the stock allocation, I generally recommend doing it in chunks instead of all at once to hedge our bets a bit and avoid the emotion of regret (in case the market falls further from here).
The one thing you don’t want to do is fall into the trap of changing your allocation over and over again based on what the market has done or what you expect it to do in the future. That’s essentially market timing on a smaller scale and we’ll almost certainly get the timing wrong more than we get it right, which will end up costing you money. That’s why our rule is that any allocation change that is made is expected to be permanent (the exception to that rule is if a client’s goals simply change, which does happen throughout life).
*Disclaimer: Past performance is not an indication of future results.