Allworth CEO Scott Hanson shares his advice for continuing to make smart investment decisions in the aftermath of COVID-19.
Our financial lives have not seen the end of uncertainty brought about by the coronavirus.
Far from it.
Unfortunately, with several business sectors seemingly on the verge of collapse, there is simply far too much strain on the barriers that surround the economic parcels we all depend upon to believe that many of these won’t eventually give way.
The key, then, is to be prepared for whatever might happen and then benefit from the recovery.
In terms of the markets, no one can say with absolute certainty how long the turbulence will last.
I can only tell you—having guided thousands of clients through four major downturns—that I’m confident the economy will eventually get beyond any challenges that arise.
With that in mind, I believe you will be in the best position to ride the recovery if you remain proactive and unemotional (in your financial and investment decision making).
If you’re not already a client of Allworth Financial (and regularly communicating with your advisor), then it’s incumbent upon you to take the steps to protect yourself from not only future uncertainty, but also to guard against the natural-but-destructive tendency to make damaging financial decisions in the face of economic adversity.
Here are 3 ways to protect your investments from the effects of the pandemic:
1. Be diversified while staying invested.
We remain extremely positive about the long-term outlook for the stock market.
That’s because history shows it’s good to stay invested, especially in times of turbulence. 1
Sure, there’s risk.
But just for the sake of argument, what’s the alternative?
To try and avoid risk, you could hide money in a safe deposit box, but even then, you are still invested in cash, which is “a market.”
And because all investments have risk, virtually everyone with assets must decide which risks are worthwhile.
With that in mind, when markets are jumpy, I sometimes meet someone who asks, “Should I move to cash?”
Right up front, let me say that while there might be a scenario (perhaps you’ve cashed out of some terrible investment a neighbor talked you into), the answer I give to the above question is almost always a resounding, “It is generally a huge mistake to move to cash.”
That’s because, first, as mentioned above, cash too is an asset class that carries with it risk and volatility.
In fact, while there are dozens of risks associated with cash, just two are the risks of inflation and taxation.
That is, as time goes by and inflation rises, the value of your cash declines.
But not only does your cash investment lose purchasing punch over time, you’ll likely be required to pay taxes on the nominal interest you receive at the highest possible rate.
Why else should you stay invested in the stock market?
Let’s say you jumped out of the market on March 16th after the Dow lost nearly 3,000 points.
You not only locked in those losses, you subsequently missed out on both March 24th and April 6th, two of the three best days in the Dow’s 125-year history. 2
Instead, to help protect your savings and investments against the volatility caused by the coronavirus, you need to stay invested in the market and maintain a diversified portfolio.
When it comes to diversification, for starters, one of the key reasons you diversify is because no investment class is vulnerable to every risk.
Secondly, when you are well allocated among a number of investment asset classes with various time horizons, risk exposures and goals, you’re not only protecting yourself from the biggest waves of the downside, you’ll also ideally have investments that move higher (or remain unchanged) when others go into decline.
2. Be a marathon investor.
To make good investment decisions, it helps to be in it for the long haul, and to refuse to see investing as a day-to-day, win/loss proposition.
Day-to-day, the markets go up and the markets go down.
But, over time, over years and decades, they go up.
In fact, history has clearly shown that while bear markets are nerve wracking, they don’t last. Markets have historically always ended up higher over the long run.2
Another reason to be a marathon investor is the beauty of compound interest.
Deposit $1,000 in the bank.
Even if you receive a nominal interest rate on your savings account, with 2% inflation, your cash’s actual purchasing power declines $20 (or so) a year.
On $500,000, you lose $10,000 in purchasing power a year.
Now, envision a 7% average yearly return (compounded each year) on that same $1,000, and after 10 years you’d have pretty much doubled your investment ($1,967.00).
Simply, long-term investing means that compounding works to give you returns on, not just your original principal, but on interest you’ve earned along the way, as well.
3. Be rebalanced (and watch out for “investment creep”).
While the overall level of the major indices have (at the time of this writing) recovered a lot from the depths of the February/March coronavirus decline, and while, as of the week of June 14th, your investments may appear to be doing reasonably well (all things considered), here’s something to watch out for.
The odds are pretty good that unless your portfolio is professionally managed—and regularly rebalanced—it’s possible that you are actually now, due to the rebound, at an even higher risk to be hurt more by another major market correction than you were even just a few months ago (when the markets were at record highs).
How can that be?
Much of the gains (though not all) since the low are largely attributable to certain asset classes, especially large-cap stocks (these are shares that trade for corporations with a market capitalization of $10 billion or more).
Simply, large companies are fueling a big part of the market’s current “resurgence,” and here’s why that could be a problem.
Let’s say, just for the sake of example, that when the market hit its March low, your investment allocation was 70/30 stocks to bonds. Assuming a roughly 40% increase in the stock portion of your allocation (due to the recent market “rebound”), and no bond growth, you’re now allocated at roughly 77/23 stocks to bonds.
This leaves you over-weighted in stocks (and under-weighted in bonds), and more exposed should the market again “correct.”
Also, please remember that rebalancing isn’t just for individual investors with a brokerage account or an advisor. This also applies to your retirement accounts such as 401(k)s, Roth IRAs and traditional IRAs.
Ask yourself when was the last time you rebalanced those?
If you aren’t already a client of Allworth Financial, call us for a free assessment.
We’ll gladly appraise your investment allocation.
1 https://www.foxbusiness.com/markets/the-dows-biggest-single-day-drops-in-history
2 https://www.morningstar.com/articles/972119/3-charts-that-show-why-investors-should-stay-the-course-throughout-market-turmoil
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