We are living through a unique time in history. As cases of Coronavirus (COVID-19) continue to increase throughout the country, extreme measures are being taken to try to slow that spread. These precautions will mean massive disruptions to our daily lives that could last weeks. While this is a difficult and scary time, our focus should be on the health and well being of everyone, particularly those most at risk of this disease.
These disruptions stand to have a significant impact on our economy and we have seen the markets react negatively to this over the past few weeks. We have now entered bear market territory with the major market indices down over 20% from the most recent peak. It has been a long time since we’ve seen market losses like this as we are coming out of one of the longest running bull markets in history.
Over the past few years we have attempted to prepare you for this inevitable market downturn because we know that bull markets don't last forever. Unfortunately, we didn't know when it would come and certainly couldn't anticipate the global pandemic that would cause it. We recognize that no amount of warnings could ever prepare you for the pain of seeing your portfolio decline in value. Nothing we can say will make you feel good about what is happening in the markets right now. All we can do is try to put this into proper perspective and help you get through this without making any rash decisions that could impact your long-term financial plans.
As you know, our investment approach does not involve any attempts to time the markets. We didn't increase stock allocations last year when the market was up over 30% and we aren't going to reduce stock allocations now that the market is down. We don't believe anyone can accurately predict when to get in and out of the market, and trying to do so will only leave you under-exposed to stocks when they rebound. We believe the best strategy is to develop an asset allocation you can stick with through the good times and the bad and to only make changes to that portfolio when the allocation moves too far from those targets.
While our best advice might be to do nothing, we know that doing nothing might be the hardest thing to do right now. So what can you do? Here are a few things to consider:
Put the market losses in perspective. Your portfolio isn't entirely invested in the stock market and you have a diversified portfolio for a reason. Through yesterday's close, the S&P 500 was down 23%, but intermediate-term US treasury bonds were positive on the year.
Review your asset allocation. Your mix of stocks and bonds will drive the performance of your portfolio. Are you still close to your target allocations or has the market volatility created an opportunity to rebalance?
Reassess your cash reserve. If you are drawing down on your portfolio to cover your cash flow needs, is your cash reserve still appropriate? Do you need to generate additional cash now to make sure you can make it through a prolonged market downturn?
Reassess your savings. If you are still saving and adding money to your portfolio, you might feel inclined to cut back your savings as the market declines, but now is a better time than ever to increase your savings if you are able to. The market might continue to decline from here, but if you keep up with steady contributions you will see the benefit over the long-run.
One benefit to a decline in the market is the ability to "harvest tax losses", which I explained back in 2018 in this blog post. If you have any investments that are currently trading below your purchase price you can sell them to take the loss for tax purposes. You can then buy a similar but not identical investment to maintain your investment exposure.
Review your debt. Interest rates have fallen sharply along with stock prices. If you have outstanding debt, you might want to refinance into a new loan at a lower rate now.
The avalanche of scary news is unlikely to subside anytime soon. As schools and businesses close, the coming days will test our sanity in many ways. Try to remember that this too shall pass. We have been through tough times throughout history and we will persevere and find a way through this as well. Stay safe, stay sane, keep calm and feel free to reach out to us if you need someone to talk to in this difficult time.
-Chris Benson, CPA, PFS