Financial markets have been aggravated recently amid fears over the impact of the fast-spreading coronavirus. These near-term disruptions to economic activity are the result of efforts to contain it. We see a downshift in 2020 global growth, with uncertainty around the size and pace of slowdown. While there are always unplanned risks, we do expect a rebound in activity once the disruptions dissipate and don’t see it derailing the U.S. expansion at this time.
What are Key Takeaways for Investors?
First, we encourage investors to keep things in historical perspective. Although we’ve never seen the stock market’s reaction to a coronavirus pandemic, we have seen the effects of past disruptions. Second, know the importance of staying invested, and avoid reacting in ways that could derail long-term financial goals. Finally, consider investment strategies to help you build a more resilient portfolio. Make sure your financial plan is diversified to provide greater security during down markets.
When market volatility increases, it becomes very difficult to know when to buy and/or sell investments. That is why it’s most important to stay the course and remain with your financial plan. Historically, some of the best trading days are very close to the worst days. The chart below shows how a hypothetical $100,000 investment in stocks would have been affected by missing the market’s top-performing days over the 20-year period from January 1, 2000 to December 31, 2019. An individual who remained invested for the entire period would have accumulated $324,019, while an investor who missed ten of the top-performing days during that period would have accumulated $161,706.
Having a Diversified Portfolio
One of the best risk management strategies is making sure you’re invested in a diversified portfolio. Having a variety of assets in your portfolio will help to reduce the overall risk. The greater the diversification, the less volatile the portfolio will be. However, with the reduction in risk may make you feel like you’re never ‘winning’. As the below chart shows, you will always feel like your portfolio is never beating the stock market in good years, but you’re still losing in bad years. This is why you need to remember your long-term goals and stay focused on your individual financial plans.
*Diversified Portfolio above is allocated as: 40% U.S. stocks, 15% international stocks, 5% small cap stocks, 30% U.S. bonds, 10% high yield bonds
During these times, we understand that market volatility can be overwhelming and cause panic when thinking about the financial future. We recommend speaking with a financial advisor to answer questions about the market, and what you can do to stay invested.