By: 28 February 2020

By now you may have seen headlines chronicling what has become the biggest weekly decline in stocks since 2008 or the largest two-day decline since 2011.  To be sure, it’s never enjoyable to see stock prices fall.  It also can’t be ignored that there is real human tragedy occurring as a result of the coronavirus.  But, with respect to the long-term success of our investment portfolios there are a few important things to keep in mind that might help ease the concern when we see stock prices fall or read another scary headline.

Stock declines are expected

Let’s start by acknowledging that while the triggering event leading to this week’s decline may be new, we all know stock price declines themselves are not new nor are they unexpected.  We have experienced declines in stock prices in the past.  We will surely experience them again in the future.  Declines can often be considered the cost of entry to earn the long-term returns stocks have delivered over the decades. 

Historical data can be helpful

In fact, since 1980, the average decline seen during any given year has been more than 14%.  At the time of this writing, the S&P 500 has declined 14.6% from its peak two weeks ago.  So, a decline of this nature is not out of the ordinary nor should it be unexpected.  Rather than the actual drop in prices, what often causes greater concern is the uncertainty of not knowing what might come next. 

I am certainly no immunologist, but to provide some context, the SARS outbreak of 2003 saw stock prices fall 12.8% and the 2015 concern over Zika resulted in a 12.9% drawdown in stock prices.  Those were also during times of lower stock prices than the present-day markets – 2003 was a market in the early stages of the dot-com recovery and 2015 was only two years after stocks surpassed their pre-Financial Crisis peak.   When stock prices reach high levels with extended periods without declines or corrections, people begin to search for reasons to sell.  When the “right” reason comes along the selling that ensues is often exaggerated.  It’s unlikely that long-term value of the largest and most successful companies in the world are 14% lower today than they were two weeks ago. 

Admittedly, historical data isn’t very comforting when trying to figure out what it all means for my portfolio.  Yet events like these remind us why the planning is so important when investing your portfolio. 

Planning prepares us

By starting with a foundational acceptance that there will be periodic declines in the equity markets occurring at unexpected times, we can be sure your portfolio is ready to absorb shocks like we’re experiencing now.  For those of you nearing or in the retirement phase of your life, this is precisely why we include a pre-determined amount of bonds in your portfolio.  It was bonds that provided cash flow when stocks fell in late 2018 and they can be relied on to do the same today.  And here’s the good news – those bonds have actually risen in price as stocks have fallen and are the perfect source to generate the cash you need while stocks are in a temporary decline. 

For those of you who are a little younger with more years ahead of you to accumulate wealth, congratulations, your next contributions to your 401ks, employee stock plans, Roth IRAs, or other investment accounts can be used to purchase shares of stock when they’re “on sale.”  

Before wrapping up, there’s one more thing to mention.  Some say the best thing to do is to “ignore the noise” when experiencing an acute downturn in the markets.  With the prevalence of social media and the 24-hour news cycle, tuning out all of the news and speculation can be difficult if not impossible.  The better approach might be to acknowledge that the noise doesn’t know what’s best for our individual plans and portfolios.  

Thanks for taking the time to read our update and let us know if you have any questions.

Best wishes,

Matt and the PrairieView Team


 

Author Image

Matt Weier, CFA, CFP®

Partner
Director of Investments
Chartered Financial Analyst
Certified Financial Planner®

For information regarding our blog disclosures, click here.

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