Lessons from Previous Market Declines

The COVID-19 virus has had far reaching health and economic effects on every citizen of the United States and many countries abroad.  From unprecedented strains on the healthcare system to the shutdown of schools and companies, these far reaching impacts have led to panic and fear.  While health concerns have been the greatest, fears about the impacts on the economy have led to significant declines in markets globally.  While these are unprecedented times and our economy may contract further before it improves, the question becomes how
much might the economy contract and what can we learn from previous economic mistakes?

 

As “stay at home” orders are issued in an attempt to contain the virus, a tremendous surge in layoffs and substantial reductions in consumer spending having occurred.  With consumer spending making up such a large percentage of our economy, many analysts are forecasting a significant decline in GDP in the first and second quarter.  In fact, according to a recent report from Goldman Sachs, they now forecast quarter-on-quarter annualized growth rates of -6 percent in Q1, -24 percent in Q2, +12 percent in Q3 and +10 percent in Q4, leaving full-year growth at -3.8 percent on an annual average basis.

 

Avoid Panic

Panic, while seemingly justified at the time, often leads to irrational short-term decision making.

From trying to “time the market” and sell investments when they are down, to buying back in only after markets rebound, human nature and emotion often drives us to do the wrong thing at the wrong time – selling low and buying high. While this is easier said than done, do your best to make decisions based upon your long-term goals and time horizon and avoid selling out of fear.  It is important to recognize that markets experience large declines or bear markets every few years, with larger declines happening less frequently.  Many investors underperform the market over the long run because they try to outsmart the market, ultimately locking in and compounding losses.  Each crisis is unique but as we saw during the financial crisis of 2008, the market eventually rebounds.

 

Boost your cash reserve fund

Most financial experts agree that it is wise to maintain 3 to 6 months of expenses in reserves.  In some cases, it may be beneficial to maintain even 9-12 months during times of heightened uncertainty like these.  To the extent that you still might be working and have the ability to do so, consider building some additional reserves.  While this usually takes time, it may still be possible for some Americans to store a little extra away.   You may also consider earmarking your tax return toward your cash reserve to provide a little extra boost for emergency funds.  Consider earmarking these funds in a combination of liquid cash and FDIC insured direct bank accounts like Ally Bank, Citizens Access or Capital One 360.

 

Adjust your budget

Social distancing has greatly reduced spending for most families.  However, with so many now out of work and forced to file for unemployment, it is important to see if there are any additional areas of the budget that can be reduced.  Pay especially close attention to monthly subscriptions and memberships that you will not be able to use for a while and start there.  Either way, it is important to get a good handle on your cash flow during this very difficult time.

 

Continue with your savings goals if you can

Depending on your circumstances, it may no longer be possible to maintain your savings goals.  However, doing so, even during market declines, can present significant investing opportunities.  Remember, if the goal is to buy low, then declining markets eventually present investing opportunities.  From continuing to save in your 401(k) and IRA to contributing monthly to a 529 plan for college, dollar cost averaging or systematically adding money to your investments throughout volatile markets can prove beneficial for some investors over the long-term.

 

Maintain diversification

While diversification does not protect against loss and does not guarantee a return, it can be especially important during volatile markets.  Consider reviewing your portfolio to ensure that you maintain a balanced, well-diversified portfolio that is appropriate for your age, risk tolerance and time frame.

 

Remember, things will eventually improve

It can be difficult to remain calm when in the midst of such a frightening health and economic event. While it may take time, we have always bounced back from previous challenges.  Consider staying disciplined with your financial decisions, avoid panicking with your investments and refocus on the things that matter most in your life.  Since everyone’s circumstances are unique, consider speaking to your financial advisor to determine the appropriate approach for you.

 

Kurt J. Rossi, MBA, CFP®, CRPC®, AIF® is a CERTIFIED FINANCIAL PLANNERtm & Wealth Advisor.  He can be reached for questions at 732-280-7550, kurt.rossi@Independentwm.com, www.bringyourfinancestolife.com & www.Independentwm.com. LPL Financial Member FINRA/SIPC.