Shelter-in-place…for your investments?
I was recently asked by the publisher of Canton Family Life Magazine, to contribute an article that would help answer frequently asked investing and financial questions, related to the COVID-19 pandemic.
What follows is the full article, excerpts of which were featured in the May edition of the magazine:
As I sit here in my home office on my MacBook, pondering how to begin, I can hear my wife downstairs teaching a virtual ballet class to a captive audience of 10 year olds. At this moment, she’s reviewing French ballet terminology with her eager students…from our kitchen! This has inexplicably become our new normal.
I hear her ask: “What does relevé mean”
“To rise! “ replies the chorus of enthusiastic ballerinas.
“What does tombé mean” she continues.
“To fall!” they all shout in unison.
Somehow, as I peruse the financial headlines I’ve been cataloging from the last few weeks, I can’t help but feel these sweet and seemingly innocent ballet words are mocking me as they float up the stairs…
Feb. 19th: S&P 500 at an all time high! (relevé)
March 23rd: Dow Jones down almost 40% since Feb 19th, fastest drop in history! (tombé)
March 26th: S&P 500 on track for best week since 1938! Dow Jones on track for best week since 1931! (relevé)
March 31st: Dow Jones on track for worst first quarter ever! (tombé)
This ballet mockery is juxtaposed with a world-wide pandemic, that is ravaging the economy and markets, and which has dramatically altered our way of life (as evidenced by ballet in my kitchen.) Sheltering-in-place has been demonstrated to curb exponential spread of the coronavirus, but what will protect your retirement savings and investments from this infection? What should you do? Shelter-your-money-in-place? Take it out of the stock market? Move it all to “safe” investments? Stop adding to your retirement accounts? Bury it in the back yard? These are all rational questions…okay, maybe not that last one.
Before I answer though, let’s take a look at where we are, how we got here, and what clues history offers, as to where we might be headed. Referring to the chart, on February 19th of this year, the S&P 500 was at an all time high, of 3,386 points. From there, it fell far more rapidly than ever before, dropping roughly 30% in just a month, hitting a low (to date) of 2,386, due to the “black swan” nature of the COVID-19 pandemic. (If you’re not familiar, black swan is a term often attached to unexpected crises, referring to the idea that at one time, black swans were assumed not to exist, simply because none had ever been seen.) And, speaking of ballet and swans, in the ballet Swan Lake, the black swan is an evil imposter who lures an impulsive and emotional prince. The prince falls for her, and this ultimately leads to his demise….but more on that later.
This chart highlights the magnitude of the market’s recent fall:
S&P 500 performance over the last year. Click here for .pdf
But now, let’s zoom out and look at it this drop in the context of market history:
Performance of the S&P 500 since 1928. Click here for .pdf
As you can see in the second chart, beginning in 1928, the index went from 17.66 points to 2,526 points (as of this writing), in 90 years fraught with world wars, natural disasters, pandemics, and more. But you can see the overall trend. Notice how the coronavirus event looks fairly typical on this chart.
But for clarity’s sake, let’s put it in terms of dollars. $1000 invested in the S&P 500 on January 1st, 1928, and simply left alone, with dividends reinvested, would be worth roughly $3.6 million today. So you see, as horrible and unprecedented as coronavirus is, it too, shall pass, and the positive long-term trajectory of the stock market will likely continue.
So against that backdrop, here are answers to some of the questions you may have:
Q: Should I get out of the market and put my money in cash?
A: I wouldn’t recommend it. Some say they will get out and then get back in when the market is lower. I have never seen someone who is spooked enough to withdraw all their money, get “less-spooked” as the market falls further, and have the presence of mind to get back in. It rarely happens. I have, however, seen people pull out of the market near the low, and then wait to get back in until it is significantly higher, thus locking in a huge loss.
Q: Should I move all my money to safe investments for now?
A: If you’re still invested in the stock market now, moving to “safe” investments like bonds would be ill-advised, because you’d be selling stocks low and likely buying bonds high. The portion of your money invested in stocks should have a relatively long time horizon, so wait, things will improve. (See the 2nd chart and first question)
Q: Should I stop adding to my 401(k) or IRA?
A: Not because of the market downturn. If your personal financial situation dictates that you need more cash flow right now due to reduced wages, stopping your contributions is understandable. If you’re able though, consider increasing your 401(k) and IRA contributions to stock oriented funds, since you’d be buying low, relatively speaking.
Q: With all these fluctuations and uncertainties, why invest any money at all? Why not just put it in the bank?
A: Good question. If you put money in the bank, your number of currency units (dollars in our case) won’t decrease at all, even when the market is plummeting. But guess what? It won’t increase much either. Your living expenses, on the other hand, will. Historically, the cost of goods and services has inflated at a rate of just under 3%, each year. This means that during roughly 30 years of retirement, your costs will rise by about 2.5 times. So, if the dollar balance in your bank account doesn’t keep up with increasing costs, you’re going backwards, in terms of your purchasing power. The only way, historically speaking, that you could’ve stayed ahead of the rising cost of goods and services, better known as “inflation,” is to have at least some portion (a majority) of your money in the stock market. The trade off, as we’ve seen, is that you have to endure the discomfort of periodic, and sometimes drastic fluctuations in your account balance.
Q: I’m retiring soon. I don’t have a long time horizon.
A: Okay, understood. You are not, however, going to withdraw all of your money at once, on any one day. And if you refer to the previous question, you need to keep at least a portion in the stock market, to have any hope of outrunning inflation. See an advisor and devise a plan, that includes a sustainable withdrawal strategy.
Q: Should I invest now?
A: I would strongly consider it, if you have cash with a long-term purpose, and you’re sure you won’t need it for several years. Of course, consult your Financial Advisor prior to making any investment decisions.
To summarize: Although it often feels more rational to do something rather than nothing, don’t be fooled by the evil “black swan.” Don’t be lured into “doing something” when what you should really be doing with your investments, is probably nothing. Reacting emotionally, as the prince did with the black swan, could lead to the demise of your money.
If you have further questions, please see the FAQs on my COVID-19 resources page, or contact me.
Below is the article as it appeared in Canton Family Life Magazine:
Read the entire issue of Canton Family Life.
Required disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
All performance referenced is historical and is no guarantee of future results.
All indices are unmanaged and may not be invested into directly.
No strategy assures success or protects against loss.
All investing involves risk including loss of principal.