Investments and a worldwide pandemic

by Don Gould

Note: Before I write about money and investments in the context of COVID-19, I want to be clear that the illness is first and foremost a health and humanitarian concern and only secondarily a financial one.

As important an asset as money may be, health and well-being are our greatest assets. Our thoughts go out to all affected directly by the illness, as well as the countless others whose daily lives have been upended in response to the threat.

Stock market quickly loses value

After reaching an all-time high on February 19, the US stock market began to reckon with the prospect of COVID-19 spreading globally. As this is written (3/18/20), the leading S&P 500 index has shed about 32 percent of its value. Daily moves of 5 percent or more have become routine. Volatility is the highest we’ve ever witnessed.

Equally notable has been the concurrent nosedive in interest rates on US government debt. The benchmark 10-year US Treasury note yield fell from 1.57 percent to as low as 0.50 percent, as investors seeking safety above all quickly bid up their price (thereby pushing down their yield).

The charts above cover the period from 1/1/2020 through 3/17/2020.

Concerns about a sharp economic contraction caused by consumers and workers sequestered at home also have put pressure on commodity prices and caused at least a short-term fracture among the cartel of oil exporting nations. Early last week, the price of crude oil plunged more than 20 percent, a 50 percent drop from its January high.

It’s natural in times of volatile markets for investors to look to their investment advisor for answers. How far down will the market go from here? When will it turn around? The honest answer: I don’t know and neither does any “expert” who claims otherwise.

What We Think We Know

We’ve seen many periods of market adversity over the decades, each with unique characteristics, including this one.

In the face of many unknowns, here’s what we think we know.

• Market turbulence will continue as events unfold.

• A COVID-19 pandemic can be thought of as a worldwide natural disaster, like a hurricane or an earthquake that works its way across the globe.

• Natural disasters quickly depress economic activity. In this instance, we can expect a substantial negative impact from the near-overnight shuttering of major swaths of the economy.

• The duration of the downturn is unclear and will depend on how governments, the public, and the scientific community respond to the emergency.

• After the crisis period passes, recovery from natural disasters is usually steady and often rapid.

• Consequently, we can expect that economies and markets will eventually recover, though the timeframe remains uncertain.

Avoid Market Timing

Fear can tempt people to sell stocks in hopes of sidestepping further decline. In theory, you buy back later at a lower price.

In practice, virtually no one does well at this sort of market timing. Turning points are only known long after the fact.

Case in point: in the 2007-2009 financial crisis, we saw a few investors bail out of stocks before the market reached bottom in March 2009. Their relief was short-lived—generally those who sold either never got back in or did so only after prices had climbed beyond the levels at which they originally sold.

In other words, even investors who managed to sell well before the market bottom ultimately gave up substantial gains. The costs were compounded for those who realized capital gains on their stock sales, increasing their tax bill.

Asset Allocation is Key

In the end, we always return to asset allocation. Why allocate some portion of your portfolio to often volatile stocks? Because in the long run, stocks have vastly outperformed safer alternatives like cash and bonds. So why not allocate all your portfolio to stocks? Because almost no one wants the entirety of their liquid assets subject to the kind of volatility we’ve been seeing.

The trick is finding the right balance between stocks and bonds—that is, between long-term growth and short-term stability. Investors vary in their portfolio size, time horizon, growth needs, and risk tolerance. As a result, the right asset allocation varies by investor and may also vary as one gets older.

Think of the “right” asset allocation as the one that enables you to stay the course, albeit with a tightly fastened seatbelt, through even highly volatile market environments.

Don Gould is president and chief investment officer of Gould Asset Management of Claremont.


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