Global concerns heightened this month as countries around the world are grappling with the novel coronavirus. Questions about economic growth and health and public safety have caused governments, corporations and individuals to feel unsettled as actions such as remote working environments and social distancing are deployed and practiced.
These concerns have injected heightened volatility into the global financial markets over the past few weeks with major global indices entering bear market territory after reaching all-time highs earlier this year. A bear market is defined as a drop of 20 percent or more in stock prices from its most recent high. Volatility, which can be positive and negative, in the financial markets is considered normal and something we expect to experience, albeit distressing for an investor in times like these.
The exhibit below displays the history of stock market downturns of at least 10%, each of which involved “unusual” market volatility and the subsequent market performance. A balanced, well-diversified portfolio has been designed to not only survive but take advantage of market downturns and financial crises. Thus, it is important to maintain discipline through this volatile period, as the data suggests this discipline should result in long-term growth and value creation for the investor.
Investors best position their portfolios to successfully capture a recovery by adhering to a long-term financial plan. Investors who do not remain disciplined and investors who do not have a plan risk locking in the downturn and missing out on the eventual portfolio returns from a recovery if they choose to react emotionally.
The logical next question an investor might ask after whether markets get worse before they get better (which we cannot answer) becomes the question, “How long could it take to recover?” For that answer, we looked at the largest to smallest peak-to-trough market losses of all time, sorted by the length of time in months it took to recover from past losses.1
Two key takeaways from this chart:
- These events happen more often than we recall (this will be the 25th such event in less than 100 years).
- Half of the time, markets have recovered in less than 12 months.
Keep in mind that during these recovery periods, investors did not know if the eventual recovery was another temporary rebound that would be wiped out by further losses, or the real deal. For those investors who have thought even for a moment about going to cash during these volatile markets, the odds of getting back in before the majority of the recovery has already taken place are unlikely in these faster recovery periods.
Buried in the press and coverage, there are positives to note for the consumer:
- The price of Brent crude oil, a measurement of oil prices, has dropped from its recent high of $68.91 a barrel on January 6, 2020 to a low price of $24.88 a barrel on March 18, 2020.2 Oil prices play a major role in the price of gasoline, and consumers can expect to see lower prices at the pump.
- The drop in long-term bond yields correlates with historically low mortgage rates. If you have a mortgage, it may be prudent to look at your current interest rate and evaluate refinancing.
- Methodically investing capital over time will capture dollar cost averaging during this period of volatility. Dollar Cost Averaging allows an investor to put money into the market at these cheaper prices while reducing the point-in-time risk of investing everything at once. It can be a great strategy to reduce volatility and regret when putting more money to work.
- It is our observation that the U.S. banking system is in a significantly better position presently than in prior financial crises. In today’s economy, we do not have the same financial and liquidity strains we were experiencing more than a decade ago.
If you have been concerned about current global events, a financial advisor can guide you through these periods of volatility, so that you can reach your long-term goals. This type of market downturn occurs about every three to five years, so if you have felt unusual anxiety during such times about investing, we encourage you to talk with a financial advisor.
We recognize that such periods are never easy to go through, and there is always the thought that it is different this time. It is difficult not to be fearful and emotional when the current situation evolves day to day. However, this is why working with a financial advisor can be prudent and be the buffer between your emotions to keep you focused on your long-term goals. Lastly, and most importantly, it is more critical to concentrate on staying healthy and keeping your family well.
Meet With Your Advisor
It is important to let us know when you have any changes in your investment objectives or financial circumstances. It is also important to review your account beneficiaries each year to make sure that no personal changes need to be made and the primary and contingent beneficiary designations are up to date and accurate. To notify us about any such changes that have occurred since we last met with you, please contact our office and schedule a meeting with your advisor.
We look forward to helping you stay on course.
1 Ben Carlson, “How Long Does It Take to Make Your Money Back After a Bear Market?” A Wealth of Common Sense, March 13, 2020.
2 Brent Crude (ICE) Generic 1st ‘CO’ Future, Bloomberg, March 9, 2020.
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Greg Feese CRPC®, Investment Advisor Representative. Advisory Services offered through PR Wealth Management Group, Inc., a Registered Investment Advisor. PR Wealth Management Group, Inc., a Registered Investment Adviser, doing business as Legacy Wealth Management Group of Las Vegas, LLC. PR Wealth Management Group, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. This is not a solicitation for sale of securities in any jurisdiction.. The investment advisory representatives referred to on this site may only transact business, effect transactions in securities, or render personalized investment advice for compensation, in compliance with state registration requirements, or an applicable exemption or exclusion.
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