As I sit to write this post, the Dow Jones Industrial Average is down just less than 1,000 points. Concerns around the impact of the Coronavirus on both human lives and economic growth is dragging down global equity markets. Investors are understandably concerned about what they should be doing. One strategy they might consider is reducing equity exposure today and returning to the market at some later date. Following are six quick thoughts to consider.
- Context – scary as today’s market reaction might be, today’s market losses represent a blip compared to the returns delivered since just the beginning of 2019. From January 1st, 2019 through February 21st, 2020, the MSCI All Country World All Cap Index was up 28.5%. With today’s roughly 3% decline, total return since the beginning of 2019 is still over 25%.
- Significant volatility – is a normal feature of markets. It periodically can and does happen.
- Historical returns – of 10.2% annualized for large U.S. stocks since 1926 have richly rewarded long-term investors. Those returns included the impact of every bad thing that has happened. However, only those investors who stayed exposed to the market realized those historical returns.
- Market prices – are set by a collective estimate of all asset-weighted market participants. A trade to move out of the market because one believes it should be trading lower based on Coronavirus (or any other reason) presumes that the investor has a unique insight that other market participants are not privy to or clever enough to see.
- Market timing – while an ostensibly rational reaction, requires an absurd level of accuracy to be worthwhile. From 1990 through 2018, the S&P 500 returned an annualized 9.3%. Missing just the 25 single best trading days over the 29-year period reduced returns by over 50% to 4.2%, just a hair better than the 2.7% returned by treasury bills.
- Discipline – is the key to successful investing. What does discipline look like when the market melts down?
- Stick to your investment plan
- Stay diversified
- Rebalance to your target allocation
- Focus on what you can control and let the rest go
is the founder and principal of Westchester, New York-based, Fifth Set Investment Advisors LLC, a Fee-Only, SEC registered investment advisory firm. Following a career in equity research, an examination of competing investment management approaches led Ian to create Fifth Set to offer clients customized wealth management strategies built on a foundation of evidence-based financial theory.