The effect of the coronavirus on the market, and the world, is becoming more and more noticeable. As levels of panic continue to rise, it can be hard for investors to not let their emotions run the show. Although it may seem counterintuitive, the best advice we can give you during these troubled times is stay the course!
The one thing you should not do in the midst of a volatile market is duck out!
We all need to keep in mind that, as hard as it is to imagine right now, the market’s current turmoil is only temporary. Eventually, the market will recover, and when it does, you will want to be there to reap the benefits! Getting out of the market now will lock in your losses, giving your portfolio no chance at improvement. And, studies have shown that being out on a big recovery day can do more damage than just riding it out.
One important thing to remember as the COVID-19 crisis continues is that the market’s reaction so far has acted like less of a plunge and more of a bungee jump – some days it is down, while other days it is up. Selling out too early means you miss out on any opportunity for any positive returns on the “up” days. Not to mention, once you pull out of the market, how can you know when it’s safe to get back in?
Let’s say you’ve invested in an airline stock that isn’t doing so well right now. You might think to yourself, “Surely it makes sense to get out now, rather than continue to accumulate losses?” So, you decide to sell at $51/share. You may watch with satisfaction as the market value drops down to $25/share and might even feel relief about your decision. But then, as it always does, the market will start to go back up. One day it might rise to $37/share. The next day, it could be back down to $23/share. You may watch with increasing anxiety as these values continue to fluctuate. Finally, you decide, “This is it. If it’s up for three days, I’ll buy back in.” You watch as the values climb – $42/share, $45/share, and then a sudden spike, all the way up to $59/share. Now, you are forced to choose between remaining in cash, missing out on positive returns as the market trends upward, or buying back in at a value much higher than what you initially sold.
If you had stayed in the market and ridden it out, your portfolio wouldn’t have locked in that loss, and you would be able to recover much quicker than you will when starting from scratch. Trust us – in a time like this, staying the course really is the best move you can make!
There are other strategies you can employ during a period of market volatility to help improve your portfolio’s performance.
One of the best methods you can use to help your portfolio weather a downturn is rebalancing. Rebalancing keeps the weightings of assets in a portfolio at the desired level of risk. For example, say you are invested in a 60/40 portfolio that is 60% stocks and 40% bonds. If the bonds outperform the stocks, changing their weighting to 60%, rebalancing will prompt you to sell some bonds and invest in more stocks to bring the portfolio back to the correct asset allocation.
Our firm utilizes rebalancing software Total Rebalance Expert, designed and developed by our principal, Sheryl Rowling. This technology allows us to check portfolios daily and rebalance whenever needed. This is especially helpful during a crisis like COVID-19, because rebalancing pushes us to take advantage of bargains, buying more when prices drop in one segment of the market.
Another great action to take advantage of in a volatile market like this is tax loss harvesting. Remember those hypothetical losses we mentioned earlier? If you stay the course and remain in the market, you have the ability to “harvest” these losses – selling these positions to gain a tax benefit, then replacing the position with a similar investment.
Tax loss harvesting is a great way to ensure you will still be in a good place, even when the market itself isn’t doing well. The losses you sell during this time can be used to offset your future taxable income. When the market eventually recovers – and past experience shows that it always does – you will see a faster recovery in your own portfolio and have a host of future tax benefits as well! Just another great reason to stay the course!
If this post has convinced you to stay the course, we have one more recommendation to ensure your portfolio is truly doing its best during this crisis.
Investing your portfolio in a diversified mix of stocks and bonds is a good strategy in general. This is especially true during extremely volatile times like now. A diversified portfolio minimizes your downside: if some investments perform poorly during a certain period, other investments may perform well.
In this crisis, entertainment and travel industries have been hit particularly hard. However, companies like Zoom that provide resources to facilitate working from home, or companies working to provide materials to prevent the spread of the coronavirus are doing quite well. So, if you are invested in a mix of airline stock and Zoom stock, your portfolio likely won’t take as big of a hit as those who invest solely in one area.
Much like the COVID-19 pandemic, the market is unpredictable. There is no way to know how long this period of volatility will last or what its long-term effects will be. However, if you stay the course and utilize the strategies mentioned above, you could turn this negative situation to your advantage. So, don’t let your emotions run the show! Stay the course, and you will be much better off.