Buying During a Crisis

The S&P 500 had its first positive week in over a month. The market reacted favorably to the fiscal stimulus package passed by the Senate. Additionally, new cases of the Coronavirus in other parts of the world, specifically in Italy, appear to be in a declining growth rate.

We are just starting to see the economic impacts from the virus, social distancing, and state-imposed lock downs. On Thursday, the weekly unemployment data showed a staggering 3.3 million unemployment claims, by far the most in history. Despite this terrible news, the S&P 500 finished up over 6% just on Thursday.

Over time, and in time, the financial markets have demonstrated a remarkable ability to anticipate a better tomorrow even when today’s news feels so bad. The speed and severity of viral outbreak, combined with the massive behavioral and economic consequences, not to mention the potential loss of life, will surely test the markets’ resolve. Where the markets go from here is anyone’s guess. However, if you believe, as we do, that this crisis will pass and America and the world will continue to prosper, then a disciplined approach to a long-term investment strategy and plan remains the key to financial success (if history is any guide).

Below is this weekend’s recommended reading:

Buying During a Crisis (Nick Maggiulli, Of Dollars and Data)

The author re-frames the thought process around averaging into the market during an economic and market downturn. Going back through history, the most productive investment decisions in a diversified portfolio have been those in which the investment took place during a downturn. The math is simple. If you accept the thesis that the market will ultimately recover, then the dollars invested today will have a higher expected long-term return than the dollars invested a month ago (when prices were higher).

This sort of re-framing looks backwards, as to be excited about acquiring shares at discounted prices, instead of forwards, as to the fear of purchasing before the market actually bottoms. This change in mindset may alleviate fear associated with adding to equity positions during a downturn.

A sharp contraction, then an upswing (Vanguard)

Vanguard revealed their economic and market projections this week in light of the Coronavirus crisis. Please note there are innumerable variables at play in this crisis – the severity of the virus, the fiscal and monetary response, the economic contraction and timeline for recovery, etc. Any forecast should not be relied upon for investment decision-making.

One piece of silver lining, as Vanguard points out, is that market downturns lead to higher expected future returns (assuming the market eventually recovers). Contained within this piece, Vanguard updates their 10-year projection for US equities.

Is It Too Late to Derisk? (Christine Benz, Morningstar)

Christine Benz, Morningstar’s director of personal finance, asks a very poignant question as it relates to reassessing risk during a downturn: Is it too late to derisk? One of her key pieces of advice, one that we subscribe to, is that – depending on your personal situation – any spending requirement in the next 2-5 years should not be invested in equities.

Christine offers another useful piece of advice to consider during this downturn. If recent volatility has led to sleepless nights and concern about the ability to stick with a long-term plan, then it may be a good time to review the long-term strategy and make adjustments, if necessary.

We hope everyone has a happy and safe weekend. Please give us a call if you have any questions.

 Disclosure:

This newsletter contains general information that may not be suitable for everyone. The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this newsletter will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security.

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