During these kind of times in the markets there can be very little room for optimism. People are seeing their accounts lose value day after day and feel that there is nothing that can be done to benefit them. Well, if you make the wrong choices during these times there are many things that you might do that either hurt you or provide little to no benefit in the long term.
Over the last month, you have probably heard or have seen that during down markets are the times when people tend to make emotional choices that may significantly hurt them in the long term. Many of us have heard the story from a friend, co-worker, or family member about how much they lost in the 2008 financial crisis and how they have never gained that money back. If you asked them why they never gained it back, the answer you most likely heard went something like: “well, when the market got so low I could not take seeing my portfolio lose value any longer, so I sold my investments and put everything in cash and CDs.”
Hopefully you can see what is wrong with that statement. If you sell out of your investments at low points, like what we are seeing now, you are locking in those losses and taking away your ability to gain them back. Some people might say they will time their re-entry into the market. They say when things are good again, they will consider re-investing. When is the good time to re-invest? Even the greatest investors in history would tell you that there is virtually no way to know this and the common everyday person will likely never invest again. Hence their answer of ‘never gaining back what they lost.’
The fact is that if someone sold their investments at the lowest point in the 2008-2009 bear market, when the S&P 500 Index was at 622, they effectively missed out on a bull market that saw the S&P 500 level rise to 3,231 on Dec 31st, 2019. Just so you know that total gain was 378% (1). These figures refer only to the S&P 500 which is made up of 500 large US company stocks, but it helps to drive the point home that these low points are not the time to let your emotions take over.
You should always remember that we, as human beings, are emotional creatures by nature. We tend to want to move towards the good and away from the bad. Investing asks you to do the opposite. You should move towards the bad. Think of a real-world example, and this has probably happened to you recently. You go to a department store; you have no intentions on buying anything that day. But you look around and the whole store is 30% off. You then walk out having purchased few items. It was on sale; it was a great time to get a few things you might have needed.
It may not seem like it, but that is exactly what is happening right now in the markets. The S&P 500, as of close of market on Friday March 20th, was down 28.6% year-to-date Not easy to see that your portfolio has gone down this year, but if you were to buy stocks now you are getting them on a massive discount. You are buying while the market is "on sale" by almost 30%.
Remember that any investment you make should be done with care and after evaluation. We believe the best way to know what investments fit your goals and objectives is to speak with a financial advisor and complete a comprehensive financial plan. The guidance and advice you get can help you to get the assets you may have sitting on the sidelines in cash to work at a very advantageous time.
Think again to the 2008 downturn example I shared earlier. Think of that same person that locked in their losses by selling their portfolio. Now, can you imagine how they would be talking about their investments if they had added to their portfolios and put some of their cash assets to work at that low point? The additions they made would have seen profit over time, and the original portfolio would have made the losses back and then some.
I often say to clients that I could ask 10 random people when they should buy stocks and when they should sell them. My best guess would say that most people would say you buy low and you sell high. I would also guess those same people would have a story about a person close to them that did the opposite and regretted it. If you look for these discounts like what we have now and use them to your advantage, it can help in the long-term.
Some people may also tell you that the losses will not stop, and the markets will ‘go to zero.’ Let me remind you that the overall market has NEVER gone to zero value. Just recall that then we talk about stocks and markets, we are referring to businesses. That is what you invest in. To say the market goes to zero is to say that all those businesses lose their entire value and never recover from that. There will be cases of individual stock losing all value and the businesses closing, but I can't see this happening to the market as a collective.
Even in cases like the last two major bear markets, the 2000 Dot Com Bubble Crash and the 2008 Global Financial Crisis, the overall market came back, and losses were recovered. What remained true in both instances was that those who sold their portfolios at the low points locked in losses and those that took advantage of the discount that was presented to them benefited in the long term.
If you want to take advantage of this down market and invest some of your hard earned dollars, it’s important to create comprehensive financial plan that takes into account your personal financial situation, risk tolerance, and goals to determine a suitable plan for investments.
If you do not have a financial plan, and want to speak with one of our professionals at Beratung Advisors about how we can educate and empower you to make informed financial decision and how you can use this market discount to help you long-term, please contact us at 412-357-2002.
(1) JP Morgan Asset Management, ‘Guide to the Markets’, 1Q 2020 <https://am.jpmorgan.com/blob-gim/1383407651970/83456/MI-GTM_1Q20.pdf>
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. The information is based on data gathered from what we believe are reliable sources. It is not guaranteed by Waddell & Reed, Inc. as to the accuracy and is not intended to be used as the basis for any investment decisions. The information presented does not constitute a solicitation for the purchase or sale of any security and is not a recommendation of any kind. Please consult your financial advisor before making financial decisions. The S&P 500 index is unmanaged and you cannot directly invest into an index. Past performance is not a guarantee of future results. Investing involves risk, including the potential loss of principal. (03/20)