The Savvy Strategy for Beating the COVID-19 Market Downturn

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Posted by The Savvy Retiree on April 20, 2020 in Make Money

Anyone in a highly pressured situation can crack and make bad decisions.

In 2008, when the stock market crashed and the S&P 500 dropped some 37%, I had a friend at Morgan Stanley who sold all his stocks after almost all of them had hit new lows. “I’ll never invest in the stock market again,” he insisted as he gutted his long-term plan.

I was not able to convince him that the market, sooner or later, would recover and that the long-term investor would do well. Actually, it was sooner rather than later. 

In 2009, the S&P, after one of its worst years, recorded one of its best years. It was up some 26%. Over the next decade, the market went on a bull run that only ended recently with the coronavirus crisis. 

Many advisers are saying the same thing now as 12 years ago: Take a long-term view. Don’t let short-term situations change your goals. This is what advisers and investment pros have been telling me for decades. Their advice is unchanged after the recent bloodletting because of the coronavirus.

“Don’t panic and act emotionally,” says Brian Behl, an adviser in Waukesh, Wisconsin. “I know most people want to feel like they are doing something and that can lead to very poor decisions, mostly selling out of the market after it has already lost value.”

Larry Ginsburg, an adviser in Oakland, California, says both the economy and the stock market will come back.

“Following this pandemic, and its huge cost in lives and financial losses, the world will continue to need goods and services,” he adds. “They will still be provided by companies, not countries. Patience is the best available tool to be used by investors to beat the bear.”

And sometimes inertia is good, another adviser says.

“If you started out with an intelligent, well-thought-out plan, one of the smartest things you can do is nothing,” says Kashif A. Ahmed in Bedford, Massachusetts. 

Francis Gannon, co-chief investment officer with Royce Investment Management, predicts that markets will recover over the long term. But over the short term, he says, we could be in for a rocky ride.

“It’s certainly possible, yes,” he says. “The daily headlines will likely dictate the behavior of the majority of investors for the duration of the outbreak, so it’s going to take time for the market to settle down. For now, perception and short-term thinking are dominating. However, we think investors should try to think in terms of years as opposed to making decisions based on the latest news.”

Another important factor, Gannon argues, is to have a regular investment program that is applied in bad times as well as good.

“I think we’d emphasize the critical importance of investing incrementally over time during uncertain, volatile periods like this. The idea of dollar cost averaging is paramount in the current environment and has been forgotten by many,” he says. 

Dollar cost averaging is a strategy in which an investor places a fixed amount into a given investment on a regular basis.

“It is also important to note, that bottoms for sectors, industries, and companies seldom occur simultaneously,” adds Gannon. “More often than not, they have bottoms of their own.”

However, in the meantime, until that bottom is reached, Sandra Adams, an adviser in Smithfield, Missouri, emphasizes the importance of liquidity.

“Keeping a healthy savings/emergency reserve is a good idea,” says Adams. She also believes you “should keep debt to a minimum, and cutting back on non-essential spending could be a good strategy, especially for those whose income sources may be wavering or are not guaranteed.”

Cash is not “trash” in bad times. Still, that’s when some cash poor investors could do silly things. These include expanding credit card debt. These are loans often taken at 20% interest rates. Some also end up selling otherwise solid stocks or investments that are merely being dragged down with the rest of the market. These are often good stocks that will likely recover along with the rest of the market when the coronavirus crash is over. 

Indeed, a cash reserve, one that tides you over for a while, can keep you from cracking under the pressure of bad times.

Written by Gregory Bresiger