Much has changed in the world of investments since the coronavirus pandemic. The volatility in the stock market this February and March rattled investors before making a rocky recovery April-July. Added to the coronavirus fears are real economic issues of companies slowing down and small businesses shuttering their doors or finding it difficult to find work. While this has been a volatile time in the markets and no one can predict when things will get back to normal, there are some key investing fundamentals that you should put into practice right now.
1. Don’t freak out. It can be harrowing to check your retirement accounts and see losses in $10,000 and $100,000 amounts. Many investors got scared in March and pulled their money out of the markets. While it’s true that you want to limit your losses, you also shouldn’t sell at the bottom, locking in your deficits. It’s like trying to catch a falling knife—when do you decide to stick your hand out and grab it? For instance, if you sell at the bottom, then when do you decide it’s safe to buy back in, once the markets are back up to a higher level? Consistently buying high and selling low is a fast way to lose money. Successful investing requires you to make rational, informed decisions. Do not let your emotions rule the day.
2. Don’t do nothing. While it’s true that you shouldn’t freak out in a market, you also shouldn’t sweep the current situation under the rug and pretend it doesn’t exist. Now is a good time to check in with your advisor, review your budget, consider building or growing your emergency fund, and most importantly, rebalance your portfolio.
Why is rebalancing so important? Let’s say you had an equal weighting in your portfolio of 50% bonds and 50% equities (stocks) in January. Due to the market volatility in March your portfolio is uneven with 60% bonds and 40% equities. This unequal allocation in your portfolio weakens its performance because when the market recovers, the stocks will be the harder-working assets in your portfolio but they only make up 40% of your portfolio instead of the 50% which you originally desired. Rebalancing is the process of selling the 10% of bonds and buying 10% of stocks to bring your account back to an equal 50/50 weighting, which may provide superior results over time. We do this automatically for clients who work with us at our firm, but if you are managing your assets yourself, you should do this every 6-12 months.
The coronavirus has been likened to the Spanish Influenza of 1918. In 1917 the stock market took a huge nosedive as fears of the worst-case scenario of the Spanish Flu widened. By 1918 it had recovered and then remember what followed—the Roaring Twenties. Perhaps there is still some upside to be gained in the markets in the years to come, just like the recovery we enjoyed a century ago. Regardless of what happens in the markets, a consistent rebalancing of your portfolio will provide superior results that will help ease your financial concerns during inevitable turbulent times.