Traders work during the opening bell at the New York Stock Exchange (NYSE) on February 28, 2020 at … [+]
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How Should You Invest In A Coronavirus Market?
If you are an investor, no doubt this week’s market action has gotten your attention. Brought on by the Coronavirus, we’re now in correction territory, a broad market decline of over 10%, and that decline was fast and furious — over just 6 trading days.
The S&P 500 Index closed at 2,954.22 today, a drop of 12.76% from Wed. Feb 19, when the S&P 500 Index closed at 3,386.15, an all-time record high close. Compare the Dow Jones Industrial Average. Today, Friday, Feb. 28, 2020, the DOW closed at 25,409.36 a drop of 14.02% from Wed. Feb. 12, when the DOW peaked at 29,551.42, an all-time record high close.
Is a bear on the horizon?
Of course, only time will tell whether a bear is lurking. After all, we’ve not experienced the Coronavirus before; we don’t know the global effects of the virus on people and businesses; and we don’t know if the Federal Reserve will act alone or in concert with other central bankers and take action, perhaps lowering interest rates.
Should you change direction?
The question is, should you change course as a result of this uncertainty?
If you make your investment decisions based on market movements such as these, you will be in and out of the market without a plan. I would question whether you can make progress. As a general rule, it’s best to ignore interim market moves unless you are a momentum trader, a day trader, or leveraged.
Traders need to be alert to daily and intraday market movements; they need to be both nimble and flexible – and unlike long-horizon investors, they do need to react to what the market is telling them.
As to anyone who is leveraged, the extra risk that is borne needs to be unwound when the market moves against them. The idea is to act from “risk on” to “risk off” when appropriate. But what about the average everyday investor?
Are you a self-directed investor?
From my perspective, with decades-long professional experience in the financial markets, I can tell you that individuals who invest their own money by themselves have an additional issue to deal with when markets roil: the investor’s conflict (wanting what is not possible — namely, high returns at no risk).
That conflict can drive investors to try to predict where the market is headed, a fool’s errand.
Anyone who wants to retire someday needs to think long term — very long term.
Think long term
Say you turned 25 in March of 2000, when you first started investing through your 401(k). “Your market” started at a peak when the S&P 500 Index hit a high of 1,527. You would have experienced the next bull market of October 2002 through October of 2007, as well as the following bear that ended in March 2009, followed by the current bull.
But what if you had turned 25 in October of 2002 instead, when the S&P 500 Index started at 776, followed by a bull run of 60 months before terminating at 1,565 in October of 2007?
In the first case (turning 25 in 2000, the top of a bull market), your return would have been about 5.8 percent for a single investment in an S&P 500 index fund. However, if you had invested monthly, as you would have through your 401(k), your return would have been close to 9 percent.
In the second case (turning 25 in 2002, the bottom of a bear market), you would have had a return of about 10 percent (here there was no meaningful difference between a single investment versus monthly investments).
Your experience as a stock investor is range-bound by the historical period of time in which you are living.
The market’s boundaries are flexible and can be erratic and emotionally taxing over short periods. But stand back, and from a distance you’ll see a different story: No matter what historical market period you find yourself in, you OWN that market — it’s yours. Get to know what it can do for you.
If you are retired, you might be interested in reading “7 steps for retirees to ride out volatile markets.”