Pandemics, like the diseases themselves, run their course. The coronavirus will also run its course, as will its impact on global markets. This article isn’t about COVID-19, though it is important to know What to do if your sick … by the CDC.
Rather this piece is about human nature and investing, and by extension, the success or failure of your long-term financial plan.
What really should be unexpected in this market is not its recent swan dive, but rather the bull market of the last 11 years and what that phenomenon has done to our collective expectations. After long bull markets, it is human nature to expect things to continue and think we can take on more risk than we really should. Then something (in this case COVID-19; what was it last time? What will it be next time?) suddenly happens and everybody reverses course from those once risk prone thoughts and behaviors!
While the knee-jerk response of instinct screams get out of the market now, logic assures us that one should stay the course and buy more (or at least stay put).
Aggravating an already fearful market by selling into declining prices won’t help the facts of the virus.It will likely hurt your long-term (pandemics are short term) financial outcomes.
The markets are a prediction machine speculating on the effects of different news events on the economy through their impact on various businesses … and then by extension … that impact on the economy … and by extension priced into the markets globally.
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But prediction and speculation can change at a moment’s notice with the revelation of new news events. Have you noticed how the markets go up one day, and down the next, by large percentages lately?
Therefore, speculation and prediction are not viable investment strategies since you would be constantly shuffling things around, further distorting market prices … further complicating the next action one should take.
Perspectives from a “Transformed Investor” A Transformed Investor’s Reaction to Coronavirus By Dave Goetsch, Executive Producer, The Big Bang Theory
Toilet paper as a study of human behavior. “The economics of the toilet paper panic—and why more stockpiling is inevitable” … or stockpiling Vicks Vapor Rub in 1918 as mentioned in the linked article. It’s a simple matter of following the herd. Do they know something I don’t? Nope! They’re doing what they saw someone else do before you saw them do it too.
Or the buying of water bottles. As if the water in your faucet is no longer no good. How’d that happen? It didn’t. But other’s behavior leads you to believe something must be up that they know and you don’t. They buy water – so others do too!
It’s the same way in the markets. People see others doing something and so they do it too. How’s that work in the markets? Someone sells. Market prices go down. Someone else sells. Market prices go down further. Cycle continues until the bottom of the cycle is reached. Then things reverse as history has shown time and time again as seen in the video above.
The below shows the DOW Index prior to the Great Recession (black number). The blue number is the market’s close on the 13th of March 2020.
Source: Yahoo Finance
Guess what? If you just stand still, all that washes out in the long run. What’s the long run again? It’s for the rest of your life!
There’s a saying: “Markets take the elevator down, and the stairs back up.”
This is reflecting the pattern where markets drop a lot in a short period of time, and then take a while longer to go back up to where they were.
What do the markets do after steep declines (the elevator)? Here’s insight from Dimensional on that very question … answer: they go up! Not immediately, but over time. Note that the returns mention in the linked article are for 100% stock portfolio allocations, both down and up. That is what the DOW graph shows above too.
However, it takes time. Long term investing is not about money for tomorrow, or this year (that money shouldn’t be invested in the first place). Long term investing is for the rest of your life!
So, what should you focus on?
When it comes to investing, it is easy to lose sight of how investing works.
In a phrase … FOCUS ON NUMBER OF SHARES.
When you invest you’re accumulating shares.
New shares are acquired when you contribute money, from dividends, interest and capital gains reinvested. It’s only when you sell when you lose shares!
You know and understand the value of those shares will go up and down. HOWEVER, the number of shares stays the same regardless of what the market’s doing! So next time you look at your investment statements, pay attention to the number of shares? Hopefully your investment provider statements show number of shares because that is the key purpose of investing – accumulate shares!
You only actually lose money when you sell those shares at a discount (and thus lock in the decline in the value of those shares). When markets turn back up with better news, you don’t have those sold shares to go up anymore.
Analogy: Does anyone sell their home when the value of the home goes down? Then re-buy that home when the value goes up. Then sell again, then buy again? No, because the home has a longer-term use for them. The shares you have now also have a longer-term use for later in your life.
By the way, you can see how much you home value has changed in the past by going to Zillow and look at the graph “Zestimate history and details.” You’ll be surprised in most cases.
If you sell shares now, when do you buy them again? And then do you sell them again? And then buy them again? Why not just keep them and not risk losing any of the return to the upside? DALBAR has researched market timing by studying real investors for decades now, explained here in this article “Market Timing: More Evidence Why It Doesn’t Work”
Your longer-term use of the shares you already own, isn’t for today, it’s for the rest of your life. A life where markets will still go up and down many more times in the future.
Strategy and process should be based on decades of academic research (i.e., evidence based).
Stay focused on the long term and put your eagle eye on what you own (shares) rather than what’s the worth (today) of your money, and stay healthy in the short term.
Businesses may disappear, however the markets will still remain. History shows rise after falls. The video above demonstrates that time and time again.
Health and Money are two different things. Stay healthy! Health should be your focus in these times – which too shall pass.