Finding the middle ground can be difficult, especially in the increasingly polarized world we live in today. From politics to the stock market, extreme opinions dominate the conversation. Social media and the ability to instantly share your views with millions of people across the globe has amplified this polarization. It’s easy to gain a massive following online by making extreme statements, which makes it difficult to keep perspective in the face of a dangerous situation.
A dangerous situation is currently staring us in the face in the form of COVID-19, commonly referred to as the Coronavirus. Originating in China, the disease has spread rapidly around the globe, and health officials worry it will continue to spread. While most healthy people will survive a Coronavirus infection, the extremely contagious nature of the disease still represents a significant threat to the global population.
The health of those who contract this disease in China and beyond should be the top priority of government officials around the world right now. Preventing millions of others from being infected is another priority. For this reason, countries around the world are shutting down travel, manufacturing, business and entertainment. There are factories in China that have been shut down for weeks now, putting a major strain on the global supply chain.
As news broke late last week that the Coronavirus had spread around the globe, financial markets reacted with a strong selloff. Nobody knows what kind of impact this disease will have on the global economy. As you might expect, opinions range from “This will just be like a really bad flu season and will go away when the weather warms up” to “This is a global pandemic that will kill millions and sink the global economy into a recession”. Could either of those beliefs turn out to be correct? Absolutely. But there are many other scenarios that are possible somewhere in between the extremes.
Maybe scientists working together around the world come up with a vaccine for Coronavirus. Maybe we find a better way to contain the virus to minimize the impact now that it has reached the US. Maybe it does spread through the US and puts a damper on the economy but its temporary and we bounce back stronger. There are a lot of ways things could play out from here. While we are naturally drawn to the extremes, the more likely scenario is probably somewhere in the middle.
The same can be said for your portfolio and it speaks to why we believe so strongly in diversification. All you heard in the news this week is how many points the Dow was down or the trillions of dollars of wealth that was lost. As I write this the S&P 500 is down over 12% over the last 5 days. But the Barclays Aggregate Bond index is up 1%. So if you had a simple 50/50 stock/bond portfolio you’d be down less than half that 12%.
It’s been very difficult to maintain a bond allocation in recent years with rates at historic lows and the stock market setting record highs on a regular basis. We’ve continued to preach that you don’t own bonds for the yield, you own them to balance your portfolio. You own them to help you weather a downturn in the stock market. It’s an extremely small sample size, and there’s no telling what bonds will do from here, but so far they have performed exactly as you’d hope they would during this selloff.
We also consistently advise clients to zoom out and take a long-term perspective. Yes, the S&P 500 is down 12% over the past 5 days, but it is still up 6% over the past 12 months, up 30% over the past 3 years, up 53% over the past 5 years, and up 222% over the past 10 years. The S&P 500 finished 2019 up over 31%, so while the current drop has been sharp and quick, it is still 18% above where it started just last year!
We know many of you understand you are diversified and know that you should take a long-term perspective, but you still have that burning desire to try to time the markets. You aren’t alone. We are all susceptible to the feeling that we have to do something, anything, when markets are in turmoil. We think we can make things better by jumping out of the market because we’ll know the right time to get back in. Unfortunately, we know that’s not the case.
We don’t have to look far back in time to prove this point. In 2018, from October 1st to December 24th the S&P 500 index fell almost 20%. At the time, the government shutdown and the trade war with China were blamed for the downturn. Then, just after Christmas, US stocks recorded their best day in a decade. The S&P 500 never looked back and had completely erased those losses by March of 2019. If you had sold out of stocks on December 14th, when the S&P was down 11%, would you have had the fortitude to jump back in at the bottom less than 2 weeks later? What about 4 weeks later when you were back to even? Or 4 weeks after that once you’d already missed out on a 6% gain? Maybe you would’ve held out until now and you’d see this latest downturn as the time to finally get back in? If so, you still would’ve missed out on a 15% return!
This time won’t look exactly like last time. Maybe stocks fall further and take longer to recover. Maybe stocks bounce back sooner. Just as we can’t predict what will happen with the Coronavirus, we can’t predict how the markets will react. Rather than jumping to extreme measures, try to find your middle ground. Make sure your portfolio is well balanced. Make sure the allocation is aligned with your risk tolerance, your return requirements and your time horizon. Stop watching the market on a daily basis. Zoom out and take a long-term perspective. And if you need to talk to someone, reach out to us, we’re here to help you through difficult times.
-Chris Benson, CPA, PFS
The views expressed represent the opinions of L.K. Benson & Company and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person.
Please see Additional Disclosures more information.