Being Invested in Scary Markets

An Answer for “Why don’t we just sell everything and wait this out?”

Global stock markets have now entered a bear market, having declined more than 30% from the recent highs as of March 23.  Making matters worse, in addition to dealing with massive amounts of volatility in their portfolios, investors are facing unprecedented stress in their personal lives, professional circumstances, and potentially their health.  The reality is these are scary times.  It’s hard not to be scared.  

In times like these we need to pause and remember what goals we set out to achieve when we started investing.  This is highly personalized and specific, but any intelligently built portfolio is designed with a purpose.  We knew declines like this would happen because they always have historically; we just didn’t know why, and we didn’t know when.  So, if you are drawing retirement income from your portfolio, you will still get your monthly check.  If you are saving for your future, your recent contributions were used to buy stocks on discount.  If your goals have not changed, you should not have to change your portfolio drastically.  The best advice is to stay the course.  But we understand this is not easy.

We have been through several crises and stock market declines and experienced many of them together with you.  We know the best time to stick to your investment discipline and buy is usually when you feel fearful, but your analysis suggests the likelihood of a positive medium- to longer-term outcome is very good.  We believe this is true today.  In the words of Warren Buffett: “Be greedy when others are fearful.”  Historically, that mantra has paid off very nicely.

 A 25% or greater drawdown in U.S. stocks is rare.  It’s happened only eight times in the past 70 years.  But such painful periods do happen.  Investors in equities need to be emotionally and financially prepared for them because the potential longer-term returns are worth the short-term discomfort. 

Since 1950, buying U.S. stocks after the initial 25% decline of a bear market—as we are doing in a prudent, incremental fashion for clients in this downturn—delivered strong returns over the next 5 or 10 years most of the time.  While we cannot guarantee that this will happen in the future, buying stocks at a discount is good discipline.

“Why don’t we just sell everything and wait this out?”

This is the number one question we receive from clients, and for good reason.  After all, given the panic all around us, it would feel nice to get off this roller coaster and be able to press pause for a little bit.  Unfortunately, markets won’t wait for you, and historically the cost of missing out on an eventual rebound will far outweigh any short-term benefit of moving to cash.  

If you want to get out of the market and stay out forever, we can build a plan around investing in only CDs and cash.  For everyone else, the reason why you shouldn’t just sell everything and wait for the dust to settle is that we simply won’t know when that is.  There is never an “all clear” sign flashing when it’s time to get back in.  

Consider in this case, if you were to sell today: when might be the right time to get back in?

  • After global cases of COVID-19 have stalled or reduced
  • Once economies have re-started and resumed some normalcy
  • Positive headlines and discussion about market recovery

Now answer this: if the news was good and economies were improving, would the market be higher or lower?  They would be higher,  and investors would have missed some of the recovery having sold and booked permanent losses when their portfolio was potentially at a lower level.  Success with market timing requires getting two decisions right: when to sell and when to get back in.  The chances of getting both correct are too low to forego the historical value provided by a buy and hold strategy.  

Despite volatility, return expectations have improved 

Given that the main catalyst for this downturn is the coronavirus (alongside an unexpected oil price war) and that there is an end game for the virus at some point.  It seems reasonable to assume that markets will rally when virus news turns incrementally positive (the spread slows, new cases stabilize or drop, treatments or vaccines are developed, etc.).  But even if this bear market lasts longer than the historical average of 18 months, potential forward-looking U.S. stock returns have already improved. 

While it may be hard to imagine now, there will be an end point to this crisis from a medical perspective and thus from an economic and financial markets perspective.  The key to overcoming panic in financial markets is to focus on the future.  Remember, severe losses only become permanent losses if you sell, go to cash, and lock them in.  Volatility is uncomfortable when you’re living through it, but a well balanced portfolio built on strong investment discipline provides a bridge through economic turmoil.

With all this said, we recognize it is natural to be concerned when volatile markets impact your portfolio holdings.  For that reason, we encourage you to connect with us to discuss any questions you have about your situation and portfolio.  We are here for you and appreciate the trust you place in us to be your guide through the everchanging financial market environment.

Perritt Capital Management, Inc. is the Registered Investment Advisor for Windgate Wealth Management accounts.  Neither Perritt Capital Management or Windgate Management provides tax advice. Consult your professional tax advisor for questions concerning your personal tax or financial situation.

Perritt Capital Management and Windgate Wealth are not responsible for, and expressly disclaims all liability for, reliance on any information contained in any third-party sites.  No guarantee that information provided in these sites is correct, complete, and up-to-date.

Data here is obtained from what are considered reliable sources.  We consider the data used to be relevant and reliable.

Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

First published Mach 2020.

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