Coronavirus Market Downturn – Impact on your Investing Strategy and Retirement Planning
The coronavirus is certainly causing confusion in the market! Market downturns due to a significant event are common, even with a virus such as the coronavirus. With an understanding of history and common principals, one can be prepared to weather this storm.
Last week was incredibly busy answering phone calls regarding the market downturn and whether it would continue to drop due to the expansion of the coronavirus. Will this be a simple market correction (a drop of 10% to 20%), or will we enter into bear market territory (a drop of 20% or more for a sustained period of time)? My initial thought was that we’ve seen this movie before. There have seen similar viral outbreaks in the not too distant past.
In 2003 we experienced the outbreak of SARS, a previous strain of the coronavirus, and the S&P reacted with a drop of about 14%. Then we had some smaller market downturns on the order of 5% to 7% due to the Avian flu in 2006, the Swine flu in 2009, MERS in 2012, the Ebola virus in 2014, and the Zika bug in 2016. In all these viral situations, the market recovered nicely and went on to record highs.
Market corrections and bear markets have been commonplace. Goldman Sachs and CNBC Reasearch has looked at the statistics since World War II.
According to research at CNBC, since WWII, we have had 26 market corrections with an average decline of 13.7%. Recoveries have taken four months on average.
The other question is whether the coronavirus will cause a continued market downturn into bear market territory. Nobody can really answer that question. But it is good to know that since WWII that have been 12 bear markets with an average decline of more than 30% and all of those recovered. Sometimes it takes a while, but the long-term reward of being in the market pays off substantially.
Here are some facts about bear markets since WWII, from the same source:
Where will the Coronavirus take the economy?
Nobody knows if the coronavirus will become more serious or not. For now at least, the economy that appears to be suffering the most is China. But since China is the hub of many manufacturing and supply chain sources, we are seeing the domino effect of manufacturing companies that are trying to sell product that rely to some degree on the manufacturing and supply chain in China. That is one reason why we are seeing some sell-off in the U.S. markets. (There may be some other reasons as well, such as over-valuation, long-running bull market, that we won’t explore here).
I’m not a medical professional, but from everything I’ve read, the coronavirus is an upper respiratory flu-like virus. Other than being highly contagious, it does not appear to be any more deadly than the regular flu. So my best guess is that the impact on the U.S. economy may be as short term as we’ve seen with the other viruses.
Actions to Take
Even if this coronavirus market downturn continues into a bear market or even recession, general Risk Tolerance, Modern Portfolio Theory, diversification, and patience still apply. The key is not to over-react by all the various media headlines. Remember that the market reaction to events such as the coronavirus and other events is temporary and that is why we have ups and downs.
It may be tempting to “time the market” and get out of equities, but that approach most often fails. What generally happens is you will sell when the market is low. Then a second “market timing” decision needs to be made – when to get back in! And then generally a second mistake is made by buying back in when prices are high. Market timing may do exactly the opposite of what you are trying to accomplish.
Follow your Financial Plan and Investment Policy Statement, if you have those. If you don’t have a written Plan yet, it is a good time to consider hiring an objective (non-commission based) fiduciary financial planner that can put these plans in place for you. It may not prevent you from getting the flu, but you may sleep better at night.
How Will the Coronavirus Market Downturn Affect my Retirement?
Corrections, bear markets, and recessions will always be with us. Especially in retirement, it can be tempting to cave in to market timing pressures. It’s more important than ever to have a foundation or a Plan to draw upon during these market downturns.
Depending on your situation, you may still need to invest for the long-term. For example, you may be self-finding your Long-Term Care requirements or have legacy goals. You may need to stay in the market, at least partially, for those reasons.
If you are at or near retirement, consider a “Bucket Strategy” to be part of your written Plan. A well thought out bucket strategy will separate your investment objectives into “buckets.” A common example that I use is the “3-Bucket Strategy:”
- Income bucket
- Reserves bucket
- Long-term investing bucket
For most people, it’s important that your income bucket is stable during the coronavirus market downturn! A good written Retirement Plan will include an Investment Policy Statement that reflects your Risk Tolerance, states your investing strategy, and acts as the guiding principals for portfolio design. Additionally, the written Plan will outline the Bucket Strategy that is best for you so that you can retire with some peace of mind.
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