Coronavirus Crashes the Market: What to Do?

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Coronavirus Crashes the Market: What to Do?

Editorial Note: This article is republished here by permission from the author. It was originally published at Saving the Crumbs. Please visit the author’s website and browse the blog for more great financial tips from a spiritual perspective. 

 

I know you haven’t heard from me on here in a while, but the coronavirus crashing the market has resulted in a lot of people contacting me with the same question… “What should I do about my investments?!” 

It turns out that besides the virus itself, the stock market has been making a lot of people sick lately!

Specifically, the question people have been asking sounds something like this: “With the market going down, wouldn’t it be better to sell before it goes down any further?”

I’m going to try to answer this question, but promise me you’ll read all the way to the end because there are some important counterpoints to what I’m sharing that’s important to balance out the picture.

Can You Tell the Future?

I can certainly understand the temptation to sell and “wait it out” during such times of market turmoil. But I’m going to urge you to not touch your investments…and a corollary to that advice is to stop checking your account balance!

The simple fact is that timing the market is a loser’s game. Why? Because we can’t know the future.

How can we know with certainty that the market will keep going down? Despite how dire the news might sound, if we’re honest with ourselves, we’ll know that we can’t. Now suppose we guess correctly and the market does fall further. The question then becomes, “When do we buy back in?” And thus, we’re stuck not only needing to predict the future, but needing to predict it TWICE! (To add insult to injury, if we were in a taxable account and there were capital gains when we sold, we would be on the hook for taxes to boot!)

And the unfortunate reality is that most investor portfolios underperform precisely because of this attempt to jump in and out of the market. And to put a finer point on it, most of the losses come not from getting out during a crash, but rather from waiting on the sidelines too long only to have to buy back in once the recovery has been well underway.

It’s not TIMING the market that matters, but TIME IN the market.

A Yes or No Question

Put another way, the decision of whether to bail on this volatile market really boils down to a simple “Yes” or “No” question: Do you believe that the market will recover? If yes, then hold. If no, then sell.

But before you make up your mind, let me remind you that market history has shown us that the market has recovered 100% of the time. Think about that, ONE HUNDRED PERCENT! And frequently, a big chunk of the recovery happens quickly off the bottom.

Let me put it another way. On March 16, 2020 the S&P 500 closed at 2,386, the lowest point so far in this current coronavirus-induced downturn. (Roughly 30% off the peak.) Do you know what the peak was leading into our last bear market? 1,565 on October 9, 2007. So to put it into perspective, if you were unfortunate enough to buy into the market at precisely the peak before the Great Recession, you would still be up 52% at the lowest point so far in this downturn! Of course you would have gone down by +50% in 2008-2009 before recovering, but that’s exactly the point:

Investing is like riding a roller coaster. Lots of ups and downs, but you won’t get hurt unless you jump off! 

(And in case you believe that the market won’t recover, I’ve written an article about that over here: The Stock Market and the End of the World)

Everybody Nobody Loves a Discount

Gas is the cheapest it’s been right now in years. Isn’t it great? Everyone loves to shop when there’s a discount, right?

Except when the stock market is on sale.

We humans are wired so strangely that we are more prone to buy into the market when it’s soaring (i.e. expensive) and instinctively want to sell when it’s on sale. Apparently the old maxim, “Buy low, sell high” is easier said than done!

Truth be told, rather than selling, this is the time to be buying. Everything is on sale! From just a month ago, the S&P 500 has been discounted by 30%! If you believe this market will recover, then why wouldn’t you pay 30% less?

So what am I doing? Well, nothing different, really. My investing is set on auto-pilot with an automatic deduction into my various accounts on a monthly basis, and I intend to keep that up as I dollar cost average into this declining market. (BTW, you can still make contributions into your IRA/Roth IRA for tax year 2019 until April 15! So it’s not too late to contribute for both 2019 and 2020!)

Some Important Caveats

Now, I need to make some important qualifications to what I’ve been saying so far.

  1. This advice is intended for people who are still in the wealth accumulation stage of their lives. So this means younger folk who have earned income and a long time horizon to recover. Older folk nearing or in retirement would have a very different calculus. If that is you, hopefully your investment portfolio was properly constructed to mitigate against the market downturn we are experiencing. There may be circumstances where selling or reallocating to a more conservative portfolio is the right thing to do. A market crash right before retirement is very bad timing.
  2. This advice is also only applicable to those with a properly constructed, well-diversified portfolio. If you’re heavily invested in a small number of stocks or a concentrated portfolio, then all bets are off. I don’t recommend people invest in individual stocks for the very reason that a market wipeout like what we’re experiencing now could destroy their investments. While the stock market overall has recovered 100% of the time, individual companies go out of business all the time.
  3. If you don’t have a fully stocked emergency fund, then it may well be wiser to sell investments even at a loss to have that liquidity available as a cushion. (Of course, that’s if the investments are not locked within a qualified account.) Given the unique type of economic crisis we’re in, an emergency fund of at least 3-6 months of expenses is an absolute necessity.

If You MUST Do Something 

As Jack Bogle liked to say during times of market turmoil, “Don’t do something, just stand there!”

But I know there are always those of us who insist on getting up to no-good. So if you’ve just got to fiddle with something. Here are a few things you can do to release that restless energy:

  1. Top Up Your Emergency Fund – I said it before, but I’ll say it again. Save up an emergency fund if you haven’t already.
  2. Review Your Investment Regimen – Review your contribution percentages for your employer retirement plan and make sure you are taking full advantage of any match that’s available to you. Check your deposit schedule to your IRA(s) and make it automated if at all possible. Do this with all of your investment accounts.
  3. Review Your Asset Allocation – Make sure that you are adequately diversified for your risk tolerance and for your investing time horizon. A properly constructed portfolio should be designed to be held through a time of market crisis. If your portfolio isn’t built properly, then it may be time to fix it.
  4. Rebalance Your Portfolio – But even a well-constructed portfolio can get out-of-whack when there’s huge volatility in the market. So it may be a good time to rebalance the different asset categories back to their proper ranges as determined in your target asset allocations.
  5. Tax-loss Harvesting – For the more advanced investors and only for taxable accounts, steep losses may present opportunities to harvest losses to offset some capital gains tax or even ordinary income tax for your 2020 taxes. Just be mindful of the wash-sale rule! Here’s an article explaining this more: How to Use Tax-Loss Harvesting to Improve Your Returns
  6. Transfer/Consolidate Accounts – If you have investments scattered hither and yon in various accounts, this might be a good time to consolidate them if you were planning to do that anyway. Particularly if you need to liquidate certain positions in order to make the move, doing so while there are capital losses may save you taxes.
  7. Roth Conversion – Also for the more sophisticated investor, if you’re interested in converting a Traditional IRA to a Roth IRA, doing so during a market downturn may also reduce the tax liability of such a conversion. This is a tricky one, so don’t try this unless you really know what you’re doing! Here’s a detailed article that breaks it down: Down Market? It’s Roth Time!

Remember What’s Most Important

Most of all, during this crisis that we are all passing through, let’s remember what’s most important. Money and investments can be important, but only insofar that it allows us to take care of what’s more important. So it’s perfectly fine to put your investments out of mind for a bit in this turbulent time while you focus on maintaining your health, taking care of your loved ones, strengthening your faith in God, and doing your part to help those around us.

Let’s stay calm, keep all things in perspective, and we’ll get through this together.

Editorial Note: This article is republished here by permission from the author. It was originally published at Saving the Crumbs. Please visit the author’s website and browse the blog for more great financial tips from a spiritual perspective. 

 

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About the author

Alistair Huong

Alistair Huong serves as the Executive Director of AudioVerse, a supporting media ministry of the Seventh-day Adventist Church. He resides in the Collegedale, TN area with his wife, Deborah, and daughter, Leilani. In his free time, he enjoys gardening and writing about personal finance at his blog, https://www.savingthecrumbs.com/.