Coronavirus Hit the Stock Market Hard. How Worried Should You Be?
Human nature tells us to run when things look ugly. Experts say that’s the last thing you should do.
With thousands of confirmed cases of COVID-19 in China and South Korea, and a rapidly growing number in Europe and the United States, the question is no longer if the coronavirus will have an effect on the global economy but rather whether it’ll be a small scratch or a giant crater.
Increasingly, the latter appears to be a distinct possibility. On Monday, analysts at the Organization for Economic Cooperation and Development predicted that a continued spread of the novel coronavirus would cut worldwide GDP growth fully in half.
This is a scary prospect for a lot of reasons, although the most immediate impact has been a hammering of 401(k)s and other investment accounts. Last week alone, the S&P 500 took a nearly 12-percent hit as skittish investors ran for the exits. No doubt, many others are thinking about the same move.
That it’s a fool’s errand to time something as complex and unpredictable as the stock market is pretty much Retirement Planning 101. And yet there’s a basic human instinct to run for the nearest exit when danger looms. Surely, it’s better to jump before the ship sinks any further, right?
Well, no. The speed with which stocks plunged last week can lead one to conclude that the freefall is going to continue. But the fact is, no one knows whether that’s true or not. Stocks actually gained nearly five percent Monday on news that central bankers are ready to take serious counter-measures (although even that doesn’t mean the sell-off is over).
Certainly, emotions are going to run high when you open your online account and see a dramatically smaller balance than the one you glimpsed just a couple weeks earlier. Now, more than ever, it may be time to simply look away for a while. For long-term investors, in particular, it’s important to keep in mind that volatility is part of the game when it comes to stocks. The point is that, over periods of a decade or longer, the market has consistently rewarded patience.
You don’t have to look back very far to see what can happen when investors start hitting the panic button. As the housing market collapse started to expose some pretty egregious risk-taking from Wall Street banks in 2007, the stock market fell into its worst bear market in recent memory. In the span of 17 months, the S&P 500 lost more than half its value, falling to 676.
But here’s the key point: those who kept buying during the downswing saw the biggest gains when things eventually turned around. Even after last week’s bloodbath, the index is now past the 3,000 mark.
Kevin Mahoney, CFP, of the Washington, DC-based financial planning firm Illumint says he’s telling his primarily Millennial-age clients to sit tight when it comes to their retirement accounts. “Whether this is the bottom or not, I’m not particularly concerned,” says Mahoney. “They’re keeping their money in for another 30 or 35 years.”
Indeed, this is the beauty of dollar-cost averaging, where you invest a fixed dollar amount from each paycheck, even when the financial news looks ugly. By continuing to buy when prices drop, you end up obtaining more shares with the same amount of cash. When the market eventually turns the corner, this steady-as-she-goes investing style ends up providing you with bigger gains.
For those who have money on the sidelines in, say, a savings account, this may actually be the perfect time to enter the market. Warren Buffett himself has used this contrarian approach to great effect, once declaring: “Be fearful when others are greedy and greedy when others are fearful.”
As long as people can tolerate a fair amount of volatility in the short term, Mahoney says the recent headlines shouldn’t cause would-be investors to lay low. “Stocks are now lower than in previous weeks, so if they need motivation to act on their savings, they can view this as a financial opportunity,” he says.
Things are a little trickier, of course, for couples who own brokerage accounts that they hoped to tap in the next few months for a new home or other big-ticket purchases. “These individuals may want to evaluate whether they can be flexible with the timing of their upcoming financial goal, such as funding a down payment,” says Mahoney. “If the market continues to struggle, they may be better off waiting and continuing to save.”
For anybody else, obsessing over the latest financial news isn’t going to do you any favors. Just ask the folks who exited the market the last time stocks took a nose-dive.