As the market is trying to analyze the economic impact of the coronavirus, it now has to also analyze what cheap oil means for the oil industry and the overall economy. Recent events between Russia and Saudi Arabia have caused oil price to drop below $30 a barrel overnight. This will bring added volatility to the markets. In addition to oil and the coronavirus, bond prices have surged to the highest prices ever, which can also bring new risks on monetary policy by the Federal Reserve. But, you are going to be ok!
We build our portfolios to include events like the ones we are currently going through. You have a plan. This is why you must stay focused long-term. This plan does NOT involve chasing performance, market-timing or reacting to market “noise.” Such temptations multiply during downturns, as investors looking to protect their portfolios seek quick fixes.
Downturns in the market are normal. Between 1980 and 2019, for example, there were eight bear markets (declines of 20% or more, lasting at least 2 months) and 13 corrections (declines of at least 10%). Unless you sell, the number of shares you own won’t fall during a downturn. In fact, the number will grow if you reinvest your funds’ income and capital gains distributions. And any market recovery should revive your portfolio too.
In times of falling asset prices, some investors overreact by selling riskier assets and moving to government securities or cash equivalents. Or they may embrace the familiar, perhaps moving from international to domestic markets, in a display of “home bias.” It is a mistake to sell assets amid market volatility in the belief that you will know when to move your money back to those assets. This is called market-timing and the chart below shows one reason why it is a bad idea.
I guided Wiser Wealth and our clients through the 2008 financial crisis. I learned many things in that year. Two that stand out today are sell some bonds and buy stock when everyone acts like the world is ending. The reward will be amazing. The second is sometimes you just need to turn the news off and go do something else. You should never let a person on television dictate your happiness.
By: Casey Smith