Maintaining perspective during the COVID-19 crisis

Last week, we published a blog post about how the COVID-19 pandemic could impact the financial markets and your retirement investing. It’s remarkable how much has changed since then. First, the US government, along with several states and regions including the Bay Area, took dramatic steps to enforce social distancing.

Then over the weekend, the US Federal Reserve made a second round of massive interest rate cuts, taking their primary benchmark rate down to zero. They also committed to purchasing $700 billion in bonds to provide liquidity to the credit markets and keep the economy afloat.

The US stock market dropped precipitously on Monday and, as of this writing, we are down about 30% from the peak in February and the US Congress is working on a $1 trillion economic stimulus and public health package.

Market volatility

Unfortunately, market volatility, fear and even panic are part of investing. In a post I wrote in 2017 I highlighted a quote from Warren Buffett from that year, that is worth including again here:

“The years ahead will occasionally deliver major market declines — even panics — that will affect virtually all stocks. During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy.” — Warren Buffett, 2017 letter to Berkshire Hathaway shareholders

At this point, it’s difficult to assess how deep and how long this pandemic and public health crisis will last. The US stock market is predicting that the societal impact will get worse before it gets better.

While there is a strong temptation to liquidate your retirement portfolio, this would be a mistake. Buying stocks during periods of panic allows you to buy earnings streams at discount prices. Neil Irwin from the New York Times describes this well in a recent article:

“But for retirement or other long-term savings, the sensible approach is to set an asset allocation that makes sense for your level of risk tolerance and stick to it. And then think of the sell-off of the last few weeks as the kind of episode that isn’t so much something to fear, but a moment of opportunity — even if an unnerving one.”

Investing in a bear market

The evidence of investors trying to time the markets is pretty compelling. Investors that sell in the downward spiral, don’t buy back in until after the markets have recovered. Investors that stay the course are buying while the market is recovering. Andy Rachleff at Wealthfront summarized it well in a recent article:

“In fact, investing in a bear market can actually increase the value of your holdings at retirement because, in effect, you get to buy at a discount all along the way.”

When it comes to investing for your long-term goals in turbulent times, the best advice can be hard to stomach. Avoid looking at your retirement accounts, take a few deep breaths, and keep contributing through your regular payroll deductions. At Guideline, we will continue to monitor and rebalance our client portfolios to ensure your investments are on track in choppy waters and smooth seas.