The Dow fell 9.99% today, the worst one-day percentage decline since the 22.6% decline of Black Monday (October 19, 1987). In just 18 days of trading the Dow shed 8,197 points or almost 28%. The rapid plunge in equity prices and the absolute torrent of alarming news about the effort to slow the spread of the coronavirus has been shocking. I won’t add to the drumbeat of disturbing headlines about closures, bans, suspensions, and postponements.
Seeing the market in free-fall is distressing. Measuring up the losses, one can’t avoid feeling regret for not getting out before the decline. Seeing prices fall dramatically day after day makes us wonder if there is a bottom. Accepting that our lives are going to be disrupted dramatically in the weeks and months ahead is difficult. We’ve never been through something like this before, and we’re not wired to easily accept change of this magnitude.
We’ll get through this. It will be difficult and it will take time—months and maybe years. But we will get through it. And I think most people know this. Even as we shudder to hear that March Madness won’t happen, that schools are closing, that church services are canceled, we know that we will move past this. Even as we acknowledge that we ourselves or people we know may be tragically affected by this, we know that we will move past this.
Investors know this too. The market knows we’ll get through this. But right now, uncertainty is creating panicked selling. Investors desperately want certainty in valuing a security. What will this company earn this year, next year, and the next? That answer can’t be found right now. It is a certainty that economic output will decline in the months ahead, and corporate earnings will definitely take a hit. How large of a hit is unknown at this point. When the virus situation becomes clearer (and it will in time), investors will gain certainty about economic growth and earnings potential, and the market will stabilize. In our view, our lives will eventually return to normal (or perhaps a new kind of normal), the market will learn to live with this situation, the economy will begin to expand and earnings will grow. Again, this will take time.
Here are some reminders that help us during times of uncertainty and falling prices:
The shares of stock in our portfolio represent ownership positions in real companies. The shares we own are much more than pieces of paper or digital entries on a computer. We own shares of companies that employ real people who get up and go to work every day. These people get paid to make their companies more efficient, more effective and more profitable. It is important to look past the frightening gyrations of a company’s stock price and remember what it is that we own.
Today we are being offered a lower price for the shares we own. In the days, weeks and months ahead, if this volatility continues, we may be offered yet-lower prices for the shares we own. We think it makes sense to resist the emotion-driven urge to “sell before the price falls further.” Don’t let the price offered induce you to sell your shares, just as you wouldn’t sell your home to a stranger who makes you a low-ball offer when your home isn’t even on the market.
Prices are set at the margin and they are set by traders, not by long-term investors. The vast majority of shares owned by individuals and institutional investors rarely trade. When the market declines or becomes alarmingly volatile, avoid thinking “Everyone is selling but me!” They’re not. In general, everyone is holding. Only the price has changed and it has changed as a result of the traders at the margin. Now you and I both know that this point (everyone is holding—only the price has changed) shouldn’t make a rational investor feel better. After all, our portfolio is worth much less than before and that is painful. But oddly, whenever we make this point most people seem to feel better. I guess it is a form of herd behavior as in, “I’m with everyone else. I’m okay.” If it makes you feel better, then I guess a little irrational behavior is acceptable. During this time of coronavirus, most investors truly are heeding the advice, “Don’t touch your face and don’t touch your 401(k)!”
It’s not different this time. Actually it is different. It is always “different.” That is why each new crisis is scary. Markets would never crash if there wasn’t a different, scary, highly uncertain situation.
We think stocks will be a better investment over the long term than holding cash or bonds. Even with the volatility of stocks, we think they will outperform over the long term. This is an important assumption. We define “long term” as ten years or more.
Our advice is to maintain a long-term view with the portfolio. We know of no other way to successfully manage wealth. Take care of liquidity first. Make sure you can make it through difficult markets without needing to sell shares of stock while they are depressed. For some people, liquidity means an income stream from stable employment. For those in or near retirement, liquidity means having seven to ten years of anticipated portfolio withdrawals (for spending) in bonds/cash. Once liquidity is taken care of, invest the rest of your money in stocks and plan to hold them for many years.
We hope these points are useful to you in the days ahead. It is unsettling to read today’s headlines, to endure this market volatility, and to see your portfolio lose value. As a client of Bragg, this has been your experience of the last few weeks. Please know that we take our responsibility to you seriously; we don’t like it when your account is down and we worry when we think you are worried. Please let us know if you would like to discuss your portfolio or your planning. We greatly appreciate your continued trust in Bragg.
Benton S. Bragg, CFA, CFP®
President, Bragg Financial Advisors