The recent decline and extreme volatility in the financial markets have been triggered directly by the impact of the coronavirus, officially known as COVID-19. There are high levels of uncertainty as public health experts work to answer key questions about how many confirmed cases there are, how long the virus will last and when the economy may reopen. The ambiguity of the situation has raised a plethora of concerns in the financial markets as questions grow about future economic growth.
Will the pandemic be the starting point of a global recession? Current indicators certainly are leading in that direction and a recession seems unavoidable. What is unknown is how long and how deep will it be. However, we have seen extreme market volatility and bear markets before. Each time the catalyst is different, but the results are the same. It’s very important that people keep this in mind and are focused on their long-term goals. It is difficult but very important to put things in perspective and use the principles of investing and financial planning such as diversification and tax loss harvesting, that have proven effective over time and have seen and withstood bear markets before.
It’s understandable that when people hear phrases like, “Worst day in the market since the 1987 crash” or references to 2008 and the great recession, bad memories are stirred and worry clouds the mind. However, as previously mentioned, the history of the market is filled with volatility, no matter the catalyst. The severity and quickness of this most recent selloff has been unlike anything we have seen and as such, has had an impact on how people feel about it. In times such as this, it is usually unwise to make any wholesale decisions on your portfolio. More often than not, it is much wiser to “take what the market gives you” to make adjustments to your investments to better position yourself for the future.
As painful as the market sell-off has been, times like these can provide tremendous opportunities for investors. History has shown us that some of the best days in the markets come after the worst. And oftentimes, immediately following the worst. The challenge is always that the best “financial” time to buy is often the very worst emotional or psychological time to buy. That is why staying invested in times like these is so critical to achieving your long- term financial goals. Trying to take emotion out of investing is a very challenging task. By focusing on the long term, it can make that very hard task a little easier to accomplish.
One of the best ways to get through periods of market turmoil like we are seeing now without making a short term mistake is to focus on the long term and to realize that any new money you are allocating towards your goals is going into the market at a lower price. Generally, a very good thing for long term investors. Use the market weakness to your advantage. However, times like these can also lay bare mistakes that were made. Is the money that is invested in the market truly long term money (2 years or more) or did you get too optimistic with the stock market. Did your asset allocation and risk tolerance get out of balance? If so, you need to rebalance and get yourself back to a more appropriate asset allocation.
Given the high-return and low-volatility markets of recent years many investors had become less focused on their risk tolerance. Allow the sudden market volatility to be a stark reminder of the risks that stocks pose. Matching your time frame and risk tolerance to your asset allocation is the single most important thing an investor can and should do. The severity and speed of this current selloff highlights just how quickly markets can move.
The biggest takeaway from all that has happened so far this year is how important it is to remain calm and always stay focused on the long-term.
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