The hysteria surrounding Coronavirus has been populated across our TV’s and news feeds for the past few months, and understandably so. As this is written in February 2020, there is currently no vaccine for the virus, and the number of people being infected and dying is increasing every day. The mere fact that there are a lot of unknowns leads to speculation, which can lead to panic. This is not a scientific journal (though I did get an A in my college Chemistry class), but this blog aims to reason why this event (and the many other similar events that will occur in the future) should not be a catalyst for emotional decisions as they relate to your investments.
“ Dow Plunges 1191 points…”, “Global Stocks have Worst Day in 2 Years…”, “Coronavirus Sparks Deep S&P 500 Drop…”. These are the headlines accompanying the markets over the past 2 weeks. Sounds frightening. And to be fair, a prolonged outbreak can certainly lead to disruptions in manufacturing, decrease in global and domestic travel, and significant reduction in production and demand for goods and services. But haven’t we seen these types of events before? (Think China market crash, Brexit, European Debt Crisis,etc.) For the long-term investor, should we abandon our financial plans and investment philosophy now? The answer, simply, is no.
The chart below shows the S&P 500 and how it performed during the period from December 31, 1969 through September 30, 2019, given selected historical events.
As you can see, the market has persevered through adverse events, and while this is not guaranteed moving forward, it can certainly provide a framework and basis for staying invested in an appropriate allocation given your risk tolerance and objectives.
“Yeah, but this time it’s different”
You may have heard these words uttered, and given the headlines presented above you may feel inclined to believe them. This phrase may be the most dangerous phrase in all of investing. The truth is, nobody knows how this will play out. Just like nobody knew how any of the events shown above would have materialized. Take a look below at how ‘financial experts’ have predicted the collapse of the stock market over the past 10 years. Had you listened and shifted your investments from stocks to bonds, you could have negatively impacted your return up to 60% over just the past 10 years!
For long-term investors, those with a greater than 20 year time horizon, should you really worry about short-term volatility? Again, the answer is no. Since 1928, there has never been a rolling 20-year period in the history of the S&P 500 where returns have been negative.
Human beings are unfortunately predisposed to certain behavioral tendencies, none of which assist in making smart financial decisions. With investing, two of the more prominent tendencies are overconfidence and self attribution bias.
A past study famously highlighted the fact that 93% of Americans viewed themselves as better drivers than average. This, of course, is impossible but highlights that fact that people hold high opinions of themselves. This sense of overconfidence can lead some to believe they know more than the market as a whole, and they can pick the best stocks at the right time.
Self-attribution bias deals with individuals thinking that successful outcomes are a direct result of their perceived expertise, while unsuccessful outcomes are the result of external factors out of their control. If only this were the case!
With the amount of information readily available today, investors would be wise to realize they cannot outsmart markets as it relates to timing. For the last chart (I promise), look at what would have happened over the period beginning January 1, 1970 until August, 31, 2019 if you had missed some of the markets best days. Just missing the one best day over the last 50 years results in a loss of approximately $14,000. Many of the best performing days happen within days or weeks of the initial decline, so ‘panic selling’ can have a serious impact on your long-term returns.
Again, this not guaranteed moving forward, but for long-term investors the best advice I can give is to remain invested, stay disciplined, don’t make emotional decisions, and tune out the noise!
- Coronavirus and other fears can certainly have short-term effects on the stock market, but the market has historically prevailed over the long-term.
- Turn off the TV. You and the media have 2 separate, sometimes conflicting, objectives. Their goal is to keep you entertained, which they do through fear and speculation. Your goal is to remain disciplined when investing and to not make rash decisions
- Do not make emotional decisions. Our ability to think clearly decreases significantly when confronted with stress or fear. Make a plan and have someone who can hold you accountable.
- Trying to time the market is a losing endeavor. Stay invested and if changes need to be made, do so with a long-term strategic approach.
Andrew Langdon is a fee-only financial planner based in Peachtree City, GA serving clients in the Greater Atlanta area. FivePoints Financial Planning provides financial planning and investment management services to families with young children. Services are offered on a project or ongoing basis.
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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Andrew Langdon, and all rights are reserved. Read the full Disclaimer.