While the world frantically searches for a vaccine or treatment for COVID-19, the impact of the virus has also recently infected the financial markets with unprecedented volatility - leading to the fastest 30% decline in market history in March, followed by the market's best month since 1987 in April. As it relates to the latter, investors everywhere are now looking for the proper prescription for their portfolios. Given these unique circumstances we are living in, it can be natural for investors to ask the question, “What should we do now?” The better question may be to ask, “How have we prepared?”
The Best Medicine is Preparation
Instead of focusing on how to react to volatile markets, we believe the focus should be on how to continually prepare for the inevitable volatility that occurs when investing in stocks. We believe that preparing for challenging market environments requires focusing on what you can control, which is best served by:
1. Remembering How Markets Work – Before this most recent market slide, since 1945, there have been 24 stock market “corrections” of 10%-20%, and 12 “bear markets” where declines were greater than 20%. It typically takes around 4-months to recover losses from “corrections,” on average. However, the recovery from “bear markets” can be anywhere from 2-5 years. “Recover” is an important word, because in general, markets always do – but the length of time it takes to recover can vary widely. Being forewarned with a relevant historical perspective can lead to being psychologically forearmed to deal with challenging markets and their aftermath.
2. Diversifying and Rebalancing – As stocks have declined, safe-haven investments like bonds, gold, and other alternatives have increased in price this year, which plays a valuable role in reducing portfolio volatility. Diversifying an investment portfolio using multiple asset classes that behave differently can often help to cushion the losses from the stock market, allowing you to withstand the market declines more effectively and remain invested over time. Additionally, the simple act of rebalancing back to your targeted mix of stocks, bonds, and alternative investments can provide the discipline to buy investments that have declined in price and sell others which have increased. Rebalancing is particularly important when large market swings occur.
3. Aligning Your Portfolio with Your Comfort Zone – Investor behavior is an essential factor in determining investment outcomes since challenging market environments impact different people in different ways. Do you know how much short-term risk you are willing to accept, in the form of potential portfolio loss, before it makes you uncomfortable and wanting to abandon your strategy? Identifying your personalized “comfort zone” can help align you with a portfolio that has the right balance between the short-term risk and long-term rewards that are part of investing. Doing so may help you maintain the critical discipline needed to remain committed to your long-term investment strategy.
4. Investing with a Financial Planning Mindset – An effective financial plan may provide you with the comfort of knowing short-term market volatility has a negligible long-term impact on your planning objectives. You can potentially find this comfort by stress-testing your plans for the large variety of investment outcomes that will likely occur over time. The proper planning mindset may help you avoid potentially rash and harmful short-term financial decisions.
We, nor anybody else, can know how the virus or a different exogenous event may further impact the economy and the markets because it is outside of our collective control. But as we like to say, it is important to control the controllable. We believe controlling how we remember, diversify, rebalance, behave, and plan can go a long way in helping one survive and potentially thrive as a long-term investor.
Todd Rebori and Jeff Wund are Principals for AtwoB, an independent registered investment adviser located in Katonah. www.atwob.com | 914-302-3233. This article is for information only and should not be considered financial planning or investment advice. The views expressed in this article are as of the date of the article, and are subject to change based on market and other conditions. This article contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. A copy of AtwoB™s current written disclosure statement discussing AtwoB™s business operations, services, and fees is available from AtwoB upon written request.