Thoughts On Market Volatility During The COVID-19 Pandemic
Some people might consider discussing personal finance and volatility during a time like this to be insensitive. But I’m here to encourage you to give yourself permission to think about how this will impact your financial future. The markets are certainly reacting to a very fluid news cycle and with that comes opportunity and risk. My goal for these next few blog posts is to help you navigate what’s happening and build your financial “prescription” for your financial plan. I know it’s a scary world right now, and I’m here to help you navigate how this all impacts your future.
First Things First
Before we dive into the specific measures you can take, I think it’s important to recognize what is within your control and what is not. Wasting precious emotional energy on what the market will do next, for example, is not productive. Instead, focus on your health. Your family. Your job. We cannot control the S&P 500 or treasury yields. The Wall Street Journal’s Jason Zweig said it beautifully when he suggested you “forget about what the stock market is going to do. Instead, focus on what you, as an investor, ought to do.”
When markets are volatile and declining, so much is made of the decline itself. Investors forget about the opportunities a down market brings. This could very well be an incredible wealth-building opportunity for you in the long-run. I’m also talking to some of my clients about refinancing their mortgage, using losses to try to offset future taxes, Roth conversions, funding 529’s, etc. Down markets present opportunities if you know where to look. I will cover some of these strategies in detail through subsequent posts, but for now, let’s talk about a couple of fundamental ideas.
Check Your Checks
If…you still pay things with checks. My clients know I’m a PITA when it comes to monitoring expenses but I *hope* they’d all confess, maybe after a drink, that it is prudent to know where your money goes. It’s hard to think of something as simple yet also powerful. Use this time to really understand how your household uses money. You could use a pen and paper (don’t do this), a spreadsheet (also tough), or a web-based aggregator (my favorite option). YNAB, Tiller, and Mint.com will pull the transactions from the banks and credit cards you link them to. This will allow you to categorize your spending and review your spending for anything that can be cut out of your financial life, even if they’re only temporarily gone. Maybe go through the last eight issues of Cook’s magazine you swore you’d get to and only resume the subscription when you’re done (guilty). Got a stack of books growing in the closet? Pick a TV subscription to cancel until you get through it. I know. I’m a nerd.
Keep in mind you can cancel all the discretionary stuff and add it back later if you really miss it. Challenge yourself to only use what you really need. I know it’s easier said than done, especially if you have kids, but consider changing your cable/internet package to something that isn’t so robust. Consider canceling memberships or subscriptions until you’ve exhausted everything you already have in your house. Since you’re probably not going anywhere for a while. Use this time to re-evaluate your emergency fund (read more about this here). I encourage my clients to keep six months’ worth of expenses in their savings accounts for emergencies. This might vary for your household based on how stable your job is right now, but six months is my standard recommendation.
Don’t be afraid to put larger expenses on the chopping block too, or at least shop them around. Your car insurance, homeowner’s insurance/renter’s insurance, and umbrella insurance can and should be shopped around every two years or so. If you haven’t already done so, consider combining lines of insurance to enjoy the greatest discounts. This could be an easy way to save hundreds of dollars per year, and a dollar saved is worth more than a dollar earned.
Zoom Zoom
Zoom out and think about the big picture. On March 12th, 2020 the Dow had its worst day since 1987. Then March 16th, 2020 said, “hold my beer,” before the market finished its worst week since 2008. Speaking of that year that shall not be named, we’re seeing volatility that’s similar to what we experienced during the financial crisis of 2008. The S&P 500 declined as much as 49% in 2009! By comparison, as of the close yesterday (3/20/2020), the S&P 500 is down almost 29% for 2020. I suspect we’re likely to see more volatility as we ramp up COVID-19 testing and confirm more cases, but the volatility is not all that remarkable by itself. As you can see below, this happens fairly regularly. The red dots are the most extreme intra-year declines for that calendar year. Some years are more extreme than others, but you’ll notice the market is not a machine that just marches onward and up. In fact, the market has declined at least 20% or more seven times in the last 40 years, and yet has finished with a positive return for the year 75% of the time. In other words, it pays to stay invested no matter how scary it gets.
Source: FactSet, Standard & Poor’s, J.P. Morgan Asset Management.
Returns are based on price index only and do not include dividends. Intra-year drops refers to the largest market drops from a peak to a trough during the year. For illustrative purposes only. Returns shown are calendar year returns from 1980 to 2019, over which time period the average annual return was 8.9%. Guide to the Markets – U.S. Data areas of December 31, 2019.
Since we’re talking about going up, stocks go up because they go down. “Say what now?” You, definitely. This roller coaster we’re on is precisely why your money grows when you invest in stocks. Stocks are what we call risky assets that demand a risk premium over risk-free assets. Which is a bunch of academic nonsense that means we don’t know what the future returns will be when we invest in stocks, so investors need to be compensated for that uncertainty. Or more simply, if you want your money to grow, you have to be willing to put up with the ups and downs, aka volatility, of stock markets. I think it bears repeating that the folks at CNBC and the like are funded by advertisements from financial companies with things to sell you that speak to your fear and emotions. Keep that in mind when they belabor that the sky is falling.
Undoubtedly, your investments are changing as the market digests information. New cases, death rates, Federal Reserve measures, tax delays, potential stimulus checks are all feeding the volatility. The market moves because it’s trying to price in the uncertainty of what’s ahead and how this will all play out. But it’s important to remember this is not the market’s first bout with uncertainty. It has overcome wars, inflation, the Asian currency crisis, 9/11, the Dotcom crash, the financial crisis, Brexit, not to mention SARS, Swine Flu, and Ebola, to name a few. That’s some scary shit, man. Oops, did I say that out loud? Here’s a look at some of the other health crises the market has overcome.
I’m not just sharing the serious things the market’s overcome to get you to close your eyes and pretend it will be all better. People are hurting. This will cost jobs, lives, and wealth. But we will overcome this. Investments have rewarded discipline in the past and I have no doubt, with the benefit of time and innovation, this will be the case with COVID-19. It’s important to stay invested, and if you have cash on the sidelines that’s above and beyond a comfortable emergency fund amount, this could be a great time to put that money to work in the market for the long-term.
I’d be happy to talk to you or anyone important to you about how this impacts financial planning and what to do going forward. As always, my initial consultation is free. Take a look at my calendar here and book a free call.
Stay safe out there, and be kind to each other.
Brendan