What Not To Do and What to Focus On
- March 13, 2020
Throughout the bull market (which turned 11 years old on 3/9/20) investors have been speculating when and how it will come to an end. No one would have predicted this: A global scare due to a virus and a disagreement on oil output by Russian and Saudi Arabia has caused the market to go into a freefall.
The New York Stock Exchange paused trading on Monday when the S&P 500 dropped 7%. It was a scary experience for many investors. In times like these, it’s important to highlight what not to do, what to focus on, and appropriate actions to take:
Here is what NOT to do:
The market doesn’t care if you check your account regularly. It will not perform better if you check every hour, minute, or at the end of each day. Continuous checking serves only one purpose: To drive you insane!
24 hours news means they need to fill all those hours with content. There aren’t new developments every second of the day. When it comes to the markets, nobody actually knows what the short-term holds. Sharing that reality wouldn’t drive up ratings. However, fear and bold short-term predictions all get people to tune in. Neither of those things are helpful to investors.
Watching your portfolio drop 10-20% in a few week timeframe is enough to cause even the most sophisticated investors to feel anxious. Emotional, rash decisions are ALWAYS the wrong approach.
What to focus on:
It’s easy for people to forget this given the recent headlines, but things are not as dire as they seem.
Non-farm payrolls added 273,000 jobs, which was 100,000 more than expected.
The U.S. Fed acted preemptively by cutting rates 50 basis points last week, with possibly more to come. While this action won’t cure Coronavirus, it’s good to see that the Federal Reserve is being accommodative.
As of this writing, the 10 year Treasury yield is approximately 0.70%. If you are a bond investor and/or need income, you need to plan a strategy to take this historically low yield environment into account.
No one knows the future or how severe and protracted the disruptions from coronavirus might be. However, since World War II, earnings typically fell an average of 18% from peak to trough in a recession, with earnings dropping 9% during mild recessions and 25% during deep ones. Expecting, and planning for, such an outcome is prudent.
Actions to take:
Instead of refreshing your account information every minute or checking the balance at the end of every day, it’s worth scheduling a time to chat about the current market conditions with your advisor. An experienced advisor has seen the good, the bad, and the ugly when it comes to market conditions and can put the current events into context. Most importantly, your advisor should be able to clearly articulate how the current market conditions will impact your ability to achieve your financial goals. This alone is far more valuable than guessing when the market will rebound or which sector will rebound first.
Financial planning 101 dictates that you should have an emergency fund in case of a rainy day. The amount to have in such an account is debatable (and should be discussed with your advisor). However, having several months or a year worth of living expenses is usually enough to ride out even the scariest market conditions. If you are nervous about the current environment, adding to this account so you have ample cash on hand is a prudent decision.
When crafting an investment plan, discussing how the inevitable market downturn will impact your portfolio is imperative. Assuming you had this discussion and incorporated such a scenario into your plan, then the best course of action is to just stick with it. The decision to do nothing may sound irresponsible, but it’s actually a very measured and prudent reaction to the chaos that seems to be unfolding before us. There is no chance that you will be able to predict the correct time to get in or out of the market. Therefore, sitting tight, fastening your seat belt, and not checking your account balance for a few months is a sensible approach.
In down markets, I often quote the sage wisdom of Warren Buffett, who said: “Be fearful when others are greedy and greedy when others are fearful.” While every fiber of your being says that you should leave the market and come back when things settle down, that is absolutely the wrong approach. The best decision is to add more money if you have cash available. Prices of large cap stocks have fallen nearly 20% since their highs. In laymen’s terms, there is currently a 20% discount on the price of large cap stocks. Everybody likes a good sale, especially when it can benefit your financial future.
While the current environment is scary, it’s important to take a breath and make sure you don’t make any big mistakes, put the recent events into context, and make prudent investment decisions to prepare your portfolio for the future.
If you’re a client and have questions about this challenging environment, call your Financial Advisor.
Not a client and worried about your portfolio? Reach out to an Oppenheimer Financial Advisor .
Jonathan Shenkman
Title:Associate Director - Investments
Portfolio Manager
OMEGA Portfolio Management
Disclosures
This article authored by Jonathan Shenkman a financial advisor at Oppenheimer & Co. Inc. The information set forth herein has been derived from sources believed to be reliable and does not purport to be a complete analysis of market segments discussed. Opinions expressed herein are subject to change without notice. Oppenheimer & Co. Inc. does not provide legal or tax advice. Opinions expressed are not intended to be a forecast of future events, a guarantee of future results, and investment advice.