By now, most of you are aware that stock markets around the globe have taken a significant hit this week due to the novel coronavirus (SARS-CoV-2) threat, with the S&P 500 falling 9% in the last four days. While dramatic, this type of drop is certainly not unprecedented, nor unexpected. There are lots of statistics, but I’ll just point to dates I remember vividly as an investment advisor: the 1987 crash, the 1990 invasion of Kuwait, the 1997 Asian financial crisis, Y2K, the technology collapse of 2000-2002, 9/11, and last but not least, the Great Recession of 2008-9.
“This time, the drop wasn’t caused by excessive leverage, the fed, rising interest rates, or high valuations. It was a virus, which is a good reminder that risk is what you never see coming.” — Michael Batnick
That said, we always know that risk itself is coming. Small, big, widespread, narrow, here, there. Small bumps, big bumps. We know it’s coming, and we never put all of our eggs in a single basket. Boring as they may be, bonds are our biggest hedge, and they’re performing just fine, thank you. This week alone, bonds are up by one-half percent, on average. We do our best to anticipate cash needs for each client for a few years, and build a cash/bond reserve to see them through periods exactly like this.
- Our advice to our clients is to stick with allocation we’ve set them up with. It can be hard, but the best thing to do in a financial crisis can be summed up as: “Don’t just do something, stand there.”
- If you’re contributing to a retirement plan or 401(k), keep it going! You’re getting better prices than you were a week ago!
- If you have extra cash lying around, further drops might be a good time to start thinking about putting it to work.*
It’s important to have bonds and cash sufficient to see you through a few years, which normally provides plenty of time for crises to pass. If we had to guess, the coronavirus may well be a part of everyday life within a year, and markets look ahead, so we would expect them to start to recover within a year or so.* But be cautious: this situation is dynamic and fluid, and it’s important to invest with caution.
There’s lots more I could say, but I wanted to get something out quickly, reflecting our concern for everyone’s peace of mind. History doesn’t exactly repeat, but it rhymes. And this investment advisor has seen a lot over the last 40 years in this business, leading us to value protection over trying for home runs. Now is one of the times when our conservative bent serves our clients well.
— Peter W. Johnson, Jr.
* Disclaimer: This article and its content are meant to be interpreted solely as general information about investing, and no specific or individual investment advice is intended nor offered via this post. Each individual’s situation is unique. Always seek the advice of a competent, licensed professional in making investment, tax and insurance decisions.