April 2020

How to Invest During an Economic Crisis

Author: Kent Thune

COVID-19, aka coronavirus, has clearly generated great concern over the health and well-being of people all around the world. While we understandably worry about contracting the virus and potentially infecting our friends or loved ones, we simultaneously wonder about the financial impact on our households and the U.S. economy as a whole.

News headlines highlighting scary COVID-19 statistics and stock market crashes certainly don’t help your well-being. It’s not easy to ignore headlines, such as “worst day in the stock market since The Great Depression.”

For this reason, possibly the most difficult challenge in this global crisis is maintaining perspective. To help in this regard, here are some questions you may have at this time, along with answers that are factual and absent of the alarmist tone you’ll see in most media outlets:

How bad will the recession be? No one knows this with certainty, but according to an Anderson/UCLA study, US GDP for the second quarter is forecast to decline by 6.5%, Q3 will slow by 1.9%, and Q4 will see a return to growth of 0.4%. Morgan Stanley forecasts the full year impact to be more severe with total 2020 GDP falling 8.8%. This is almost Great Recession levels but not near Great Depression severity.

How long will the coronavirus last? No one knows this with certainty, but we do have data from other countries. China and South Korea have already begun recoveries and are beginning to normalize. By the week of March 16, China reported zero new domestic COVID-19 cases, and they began normalizing Wuhan and Hubei during the week of March 23. During the same time frame, South Korea reported more recoveries than infections for three consecutive days. Based on these cases, and if the U.S. can ramp up the testing while maintaining social distancing, the U.S. could expect to see a dramatic rise in infections through the first half of April and a leveling off and decline of new infections in May. Keep in mind that the spread of coronavirus will vary throughout the country. Densely populated areas such as Los Angeles, San Francisco, New York, and Chicago will likely see the greatest impact. However, some isolated cases of outbreaks can occur in less-populated areas.

What should investors do now? Although the bottom for stock prices may not have been seen yet, long-term investors can “dollar-cost average” down in increments. For most people, the best way to accomplish this is to continue regular contributions to retirement plans, such as 401(k) plans and IRAs. The more purchases of stocks and stock mutual funds you make at lower prices, the faster your pre-crisis balances will be restored. Other investors may want to “nibble” on beaten down stocks. Technology and health appear to be sectors that are oversold now.

Should I be worried about this market crash? Most investors don’t need to begin making withdrawals from their investment accounts for at least 10 years or more; therefore, it’s important for these investors to keep a long-term view. As of the end of trading March 23, 2020, stocks were down 32% from the most recent highs in February. That’s the “headline number.” But dig deeper and you see the proper perspective, which never looks at a one-month return. Through March 23, stocks (the S&P 500) had an annualized 10-year return of 8.80%. Depending on what history you analyze, this is an average to above-average long-term return. Ignore the short-term returns and keep focusing on the long term.

What should retired investors do (or not do) now? If you are depending on investments for income, it’s likely that you are not 100% invested in stocks. The typical retired investor will have an asset allocation of 30-60% stocks, 40-70% bonds, and possibly 5-10% cash. A balanced portfolio of 60% stocks and 40% bonds would have a -9.91% annual return through the recent bottom on March 23. That certainly beats the -32% drop for the past 30 days. The 10-year return on this portfolio was 6.80%. Keep in mind that on average, it takes 3.3 years for stocks to recover from a bear market. Bottom line: If you have at least three years of income in some combination of cash and bonds, it may not be necessary to sell stocks at this time.

Does it make sense to hold stocks now? You’ve probably heard the saying, “Life is 10% of what happens to you and 90% of how you react.” It’s the same with investing (although when you react also applies). Between 80% and 90% of the returns realized on stocks occurs on less than 10% of trading days. So, if you’re out of the market when stocks have the biggest gains, your long-term returns will be significantly lower. For example, between 1986 and 2005, the S&P 500 compounded at an annual rate of return of 11.9%, even after factoring in the market crash in 1987, two recessions, two wars, 9/11, the 2000’s “tech-wreck,” accounting scandals (i.e. Enron), and more. Due to market timing (selling at inopportune times), the average investor’s return during that time was only 3.9%.

Are any investors buying stocks now? According to a senior editor at InvestorPlace.com, never in the history of time have more people searched “stocks to buy” than at 10 a.m. (EST) on Thursday, March 12 (the S&P opened down 10% in that hour). The second most popular time for this search term in the history of Google was 10 a.m. on Monday, March 16 (the S&P opened down 13% in that hour).

What lessons can be learned from this market and economic crisis? The greatest investment returns are not as much a product of selecting the right investments or even the right timing, but more a product of the right investment behavior. A majority of any given portfolio’s returns are impacted more by asset allocation (your mix of stocks, bonds and cash) and less by the investment selection. This means that picking the best investments at the best time matters less than having the appropriate asset mix.

Remember the present and past and apply the lessons you learned to your future. This is a universal truth that applies to much more than investing. Another universal truth: If you learn, you don’t lose. If you’ve never been through a major market correction or a severe economic recession, use this time to learn. This doesn’t mean that you become more cautious and learn to survive but that you grow more courageous and learn how to live.

Kent Thune has 22 years of experience as an investment advisor, navigating multiple market and economic conditions for clients all around the U.S. Thune is a Certified Financial Planner® and is the owner of a Hilton Head Island investment advisory firm, Atlantic Capital Investments. He is also a personal financial counselor to Marines and other service members on Parris Island. Thune’s financial guidance has been published at The Motley Fool, Yahoo Finance, Kiplinger.com, MarketWatch.com, Nasdaq.com, InvestorPlace.com, and on his own blog at TheFinancialPhilosopher.com. The information in this article is provided for discussion purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.

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