Published 3/25/2020 in The Maryland Daily Record
This has been a huge few weeks in the world and a major shift in the euphoric state of being that many of us had fallen into when considering our expectations for investment returns.
For over a year, within my team, we have been on the lookout for “the thing” that would kick off the market. We knew there would be something to move the attention away from politics, causing the markets to shift into fear mode. We couldn’t have predicted what it would be and regret that it is a virus outbreak that has put lives in danger.
As news of the spread of COVID-19 tops every conversation, the financial markets are reacting. Every single new development is reported in real time as panic has spread and the feeling that this time could be different is spoken as a matter of fact.
With these events, we are faced with a real double whammy. The very human response to the fear that our financial security is at risk is enough on its own. However, combined with perhaps an even greater fear of our own health and well-being exposed to a virus with no current vaccine or cure puts this over the top.
In the words of Ralph Waldo Emerson, “The first wealth is health.”
This type of event feels epic, scary and different so it is important to look back as the documented historical instances of similar outbreaks in this century for guidance on how the market performs during times of such great uncertainty.
Some outbreaks in recent history:
- 2016-2017: The Zika virus.
- 2014: The Ebola outbreak.
- 2009: The swine flu.
- 2005-2006: The bird flu.
- 2003-2004: SARS, which also originated in China.
It is difficult to remember how we felt when these events happened. Each of these occurrences was scary and likely felt different, at the time, from anything ever before. We can recall instances when trips were canceled, someone learned she was pregnant and didn’t travel to Zika-exposed islands and masks were worn by people fearing SARS in China.
Yet the S&P 500 closed 2019 at 3230.78 almost 4 times higher than the price at the start of 2003 and an annualized return of 9.89% from 2003-2019. While these epidemics are absolutely devastating to the lives lost, we need to maintain a healthy perspective and reassess the short-term reaction that influences our longer-term ability to grow our assets in the investment markets.
We know there is no consistent or accurate way to time when markets are going up or down. Instead, we can rely on some critical steps that help to create shorter-term security during periods that feel as uncertain as these.
Cash is the key
You should have a hearty cash reserve set aside to ensure that daily living expenses are covered. This is the most impactful antidote I have advised for clients in my career. When people know that they can afford to cover their lifestyle for the foreseeable future, a sense of calm is maintained.
Our guidance is to have at least one year of living expenses multiplied by the amount of months/years you feel it could possible take for things to stabilize and recover. For some, this is two-three years; the most doomsday person I have encountered settled on five years of cash in reserve. Historically, it hasn’t taken more than 18 months for the economy to fully come back after a major event and that was after 2008-2009.
Increased communication with your advisers or investment support is the next best step a person can take. This connection helps to ensure that long-term investments remain invested.
The behavioral decisions to do something, or nothing, directly impact the likelihood of achieving the long-term goals that were established at the outset — which is the underlying WHY behind all of this. The point here is that communication is key to be able to afford to take care of our needs in the future, to make a greater impact, to do whatever it is that matters to each investor overall.
Is this an opportunity?
Consider that these down days in the markets are buying opportunities. The great Warren Buffet once was quoted as saying, “Be fearful when others are greedy. Be greedy when others are fearful.” The markets have been so rich for a long enough period of time that if cash is available, this period could be ideal to add more into your portfolio while prices are lower.
As always, I welcome your questions and input around these issues. In the meantime, I think the most helpful – and certainly most heartfelt – investment advice I can offer would be that you turn off the television and keep the faith!
—Dorie Fain, founder and CEO of &Wealth