More thoughts on the Coronavirus and the recent market decline - Carroll Financial
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March 4, 2020

More thoughts on the Coronavirus and the recent market decline

Author: Marty Moore, CFP®

 

More thoughts on the Coronavirus and the recent market decline

In my January Newsworthy I mentioned being asked by an acquaintance at a holiday party how I thought the market was going to do this year.  You may recall that my answer was surely less than satisfying as I didn’t have much of an answer at all.  My reply was simply to say that I didn’t really have an opinion as predicting the short-term direction of the market is impossible.

I got to thinking recently about how amazing it would have been if I had answered: “An unknown, never before seen virus is soon going to strike worldwide causing widespread illness and death which will result in the stock market diving sharply in a matter of days.”

That’s ridiculous, of course, but the Coronavirus scare is another example of how big market declines often come as a surprise for reasons that are impossible (or practically impossible) to know ahead of time.

Apollo 13 was scheduled to be the third spacecraft to land on the moon in 1970.  You may remember that it did not achieve its mission and was forced to orbit the moon instead and eventually fly home.  As depicted in the Tom Hanks movie, Jack Swigert, the chief pilot on the mission, said after returning home: “Nobody thought the spacecraft would lose two fuel cells and two oxygen tanks.  It couldn’t happen.  If somebody had thrown that at us in the simulator, we’d have said, ‘Come on, you’re not being realistic.’”

Years of training, facing every conceivable problem and circumstance, didn’t account for what happened to the Apollo 13 crew.  Their training did, however, allow them to calmly assess the situation and return home safely.

And so it goes with the stock market.  From time-to-time we get thrown a curveball.

Anxiety sets in and we feel awful.  We seek out answers and listen to those that have strong opinions, because shrugging your shoulders feels irresponsible and careless.  Unfortunately, when things are most uncertain, firm answers don’t really exist.

Questions, when answers don’t exist

During times like this, when there are no firm answers, it’s really more helpful to ask the right questions.  Here are some that come to mind:

If I sell now what is my plan for buying back in?

Has my time horizon, risk profile or personal circumstances changed meaningfully in the last few days that would warrant a change to my investment plan?

My account balance is down but is my financial future seriously in jeopardy at this point?

Is my portfolio diversified properly and durable enough to withstand sudden market declines?

Do I need the money that has declined in value within the next 3-5 years?

How did I react in previous market declines and what might I have learned?

There are no not right or wrong answers here.  These questions are appropriate no matter the market environment but they are especially important during market declines because that’s when we’re tempted to take the wheel and do something that gives us the illusion that we’re in control.

Real control comes, however, by having a well thought out financial and investment plan.  So, maybe the most important question is:
Do I have a long-term, goals based financial and investment plan?

Still, it’s not just having a plan – it must be implemented, updated routinely and adjusted when necessary (which is seldom during times of market distress).

Control what you can control

In one of my college psychology (or maybe sociology) classes I remember reading about a study conducted where gamblers at a Las Vegas casino craps table would routinely throw the dice harder if they were wishing for a high number and throw it softer if wishing for a low number.  Doing this gave the gamblers and illusion of control but obviously had no bearing on what number came up.

We can’t control what happens in the market any more than we can control the roll of the dice.  But we can have a financial and investment plan that allows us to withstand a big market decline.

To buy or sell?

 

Buying stocks is easier when the market is going up because it makes us feel like an investing genus.

Conversely, buying stocks when the market is falling makes us feel like a fool.

And buying stocks when they’re falling hard, as they have this past week, rarely feels like the right move.

But… we’re told to buy low and sell high, right?  Is now the right time?  Who knows, because buying low often means buying lower later, and maybe even lower later than that.

I don’t know if we’re at the low point now.  I’m confident that the Coronavirus will eventually be brought under control.  I’m less confident about what affect this will ultimately have on the world economy.  Reduced economic activity is likely to reduce economic growth here and around the world.  A recession could result.

For now, we believe the best course of action is to stay the course.  We’re not shrugging our shoulders.  It’s our best advice – a course of action that we believe has the best chance of allowing you to maintain course for achieving your financial goals.

During the 1960’s when the United States was in a race with the Russians to land the first man on the moon, they trained their astronauts in one particular skill more than any other – the art of not panicking.  A skill particularly important to the crew of Apollo 13.

How to be a successful investor

By: Safal Niveshak; A Wall of Ideas

As always, thanks for reading.

Marty

 

Required disclosures:

  • All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.
    The S&P 500 Index is a capitalization‐weighted index made up of 500 widely held large‐cap U.S. stocks in the Industrials, Transportation, Utilities and Financials sectors.
  • The Dow Jones Industrial Average is a widely followed market indicator based on a price-weighted average of 30 blue-chip stocks that trade on the New York Stock Exchange which are selected by editors of The Wall Street Journal.
  • A diversified portfolio does not assure a profit or protect against loss in a declining market.
  • Asset allocation is an investment strategy that will not guarantee a profit or protect you from loss.
  • You cannot invest directly in an index. Additional risks are associated with international investing, such as currency fluctuations, political and economic stability and differences in accounting standards all of which are magnified in emerging markets.
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