Epidemic Recoveries – A Return to Normal from the Bear Market
When will the epidemic recovery occur so we can get back to normal? It’s hard to believe one month ago the Dow Jones average hit a high of 29,551.42. Since then, we’ve experienced a US stock market meltdown and volatility similar to that of 2008. Yesterday, the Dow plummeted to 20,188.52, a drop of 31.7% from the high, meaning we are definitely in “bear market” territory. Many Advisers have been telling investors to expect a downturn for a long time. A correction has been expected. Although, nobody predicted it would be because of an unknown virus.
Thankfully, if you are following your Plan, many of you should be in a highly diversified, low-correlated portfolio with a sizeable amount of “cash” for a buffer. Your portfolio is designed to have less downturn than what we’re seeing in the headlines.
Whether you have followed our portfolio recommendations or not, hopefully you are following some good lessons learned from the 2008-2009 bear market:
- By riding out the S&P 500 decline of 38% in 2008, investors then experienced an 11-year bull market producing above average real returns over the next 10 years.
- Many retirees and near-retirees learned from 2008 to have a cash reserve account with 1-5 years of income in cash. (I know many of you questioned why I was recommending about 3 years of income in cash, this is why).
- Retirement Planning has become more of a holistic financial plan than an investment plan. We now include Income Planning (#2 above) with Social Security optimization strategies, tax-efficient withdrawal strategies, Roth Conversions, and asset pool investing for Long-Term Care. It takes all these components and more to make a comprehensive Retirement Plan. See Insight article “Main Pillars of Retirement Planning.”
- Perhaps most importantly, savvy investors have learned to diversify their portfolio beyond stocks and bonds, by considering many other asset classes, such as Real Estate Investment Trusts and TIPS, in a highly diversified and properly correlated portfolio design.
Nobody knows if this bear market will continue or not. If it’s just because of the coronavirus, we may have a very quick upward turnaround when the virus gets under control and people get back to their normal lives.
In my previous Insight article, part 1 of the coronavirous meltdown,“Coronavirus Market Downturn”, a chart showed the 12 bear markets since World War II. The average decline in those bear market years was an average of 30%. If the current bear market is “average” it should be at or near bottom already (we’re at a 31.7% decline as of yesterday).
But, because this one is different, more decline could follow. We may even have a mild recession. We have recovered from all of them. If we end up with a negative economic impact such as a significant and continued reduction in GDP, then I suspect things may get worse before they get better.
An Epidemic Recovery will be Coming
But this is not 2008! Our financial system is very strong. Unemployment is low. Each of the previous viral attacks has had a quick and strong recovery. Even if this one is “different,” and a little deeper and longer than the others, the pattern has been an upward trend:
Course of Action
What is your best course of action? I would still follow my previous advice and not try to time the market. If you are scared, which is perfectly normal, acknowledge the fear—and leave your portfolio alone. If you look again at the chart above, it would be hard to get hurt in the long term by staying with your portfolio.
Many investors who jump out too late or wait too long to get back in get financially hurt.
Consider rebalancing your portfolio to realign with the asset mix design. Perhaps even consider retaking your Risk Tolerance temperature. Many people will find that their risk tolerance changes (goes lower) when we are in a bear market. This is human nature. We have high tolerance when we’re gaining and lower tolerance when we’re losing.
Also, ignore the talking heads proclaiming gloom and doom. Markets will rebound the same way as they did in the past. If necessary, turn off or limit your consumption of financial news.
Finally, reach out to your fiduciary financial adviser if you have questions or feel anxious about your specific situation. We are there to help.
About Kastler Financial Planning
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