When I look back at the market downturn caused by the COVID-19 pandemic, it reinforces two important lessons for our clients:
1. Do not panic and sell investments when the market sharply declines.
2. It is VERY difficult to know how long a stock market recovery will take.
Stock market returns have been tracked now for about 150 years. During that timeframe, the market has been sprinkled with downturns of 20% or more, which is referred to as a bear market. However, in each case, the market eventually recovers and then goes on to new heights. The COVID-19 bear market was no exception. It only lasted four months. The US Equity market fully recovered and was back to its pre COVID level by July and since then, it has, once again, reached new heights.1
How do I stay calm and invested?
Investment panic can be tricky. It’s an emotional condition. It’s hard not to panic while a downturn is happening. Information moves so quickly. We can get all the facts and figures we need on a second-by-second basis on our handheld devices, from news stations, and our computers. However, having too much information can prove to be detrimental. This can lead to panic or making rash decisions. There is no need to panic if your long-term fundamentals have not changed. A risk assessment and review are necessary to make needed adjustments to the existing portfolio. Ironically, a sharp market decline can also create opportunities to participate in other investments that would otherwise be too expensive or unattractive to own. The key is to remain invested, but with differing risk parameters.
Stock Market declines come in all shapes and sizes. How long each one lasts is unpredictable. According to Morningstar, in the last 150 years, there have been 18 bear markets, suggesting that on average they occur once every eight years.
As stated above, the shortest market recovery was the pandemic, but the longest recovery took almost 9 years from September 1974 till June 1983. Predicting the markets peak or bottom is very difficult. The most prudent option is to prepare now for the next downturn by owning a well-diversified portfolio that fits one’s time horizon and risk tolerance. Market risk is about more than just volatility. Market risk also includes the possibility of depressed markets and extreme events. These events can be very frightening in the short term, but analysis and history has shown that investors who can stay the course and remain in the market for the long run stand to benefit greatly.
1. morningstar.com/articles/1028407/in-long-history-of-market-crashes-coronavirus-crash-was-the-shortest