Itís hard to recall a time when market volatility has been as intense as it has been during the coronavirus pandemic. Between March 1 and March 31, 2020, federal, state and local governments imposed shutdown orders aimed at halting the spread of the virus, in the process shutting down nearly a third of the U.S. economy. That shutdown battered the stock market: In late February the Dow Jones Industrial Average was soaring above 29,000, but by late March it was struggling to stay above 18,000. Then, shortly after the passage of the CARES Act, stocks rallied. By the second week of April the Dow had begun climbing up off its March low and was ranging between 23,000 and 24,000.
In volatile times like these it takes a strong stomach to jump into the market Ė or to just stay in the market. But now, perhaps more than ever, itís important to think carefully about how to manage your portfolio. Here are four key considerations to weigh as you decide what to do.
Think Twice Before Selling
The stock market has taken its biggest hit since 2008. Even bonds have taken a hit. It is widely acknowledged weíre already in a recession. During a recession itís common to instinctively bail on the market. Many retail investors want to get their money out of assets that seem vulnerable to a freefall, which might make perfect sense from an emotional point of view.
But the marketís volatility will ease and economic fundamentals will once again dictate the marketís direction.
Unless you need your money in the immediate future or believe you have invested in industries unlikely to recover, for most investors it may be the wisest choice to keep your money right where it is. Thatís especially true if selling right now will only mean converting hypothetical losses into real, actual cash. If you wait and let the market recover, you can regain that value. Indeed, those investors who stayed put while the bottom was falling out of the market have already seen significant recovery in their savings.
During the Great Recession it took the stock market two years to recover. Thereís no good way to tell how long the post-quarantine recovery will take, or what dips it might experience along the way, but one thing is certain: Right now, selling out of fear or impatience could be a very good way to lose money.
Many investors are focused on liquidity right now. For anyone worried about losing their job, which should be almost everyone, the last thing they want is to invest money they later need for rent. This is a very legitimate concern, and itís important to balance your need for cash today against your need for cash in retirement.
At the same time, for anyone with money to invest, right now represents an extraordinary opportunity.
Some companies will come out of the coronavirus battered. Most, however, are currently deeply undervalued. Stock prices reflect market-wide fear and short-term loss of revenue more than any actual weaknesses in a companyís underlying business model. Coffee shops may be currently empty, but in a year or two or three they will be as busy as ever. Airlines may be struggling, but by next summer those planes will be full again.
Hold back the money youíll need for an emergency. If youíre concerned about short-term cash, buy assets that you can sell off quickly. But if at all possible, a bear market is often the right time to buy.
At the same time, avoid trying to time the marketís recovery. Itís an emotional approach to trading. It plays on a combination of greed and the investorís natural urge to just do something. Further, it depends on perfection.
Focus on Funds
The 2020 recession has turned the stock market upside down. For the next year professional investors will spend much of their time trying to predict specific industries and companies that will bounce back fastest. Some companies will flourish; others may not survive.
Retail investors looking to grow their money during the current market can mitigate risk by focusing on funds, either mutual or exchange-traded. Buy industry-specific funds if you would like to bet on that sectorís success. Or simply invest in market-index funds, then hold them while the economy bounces back, even if that takes several years.
For the foreseeable future, just about any degree of risk will be significantly magnified, particularly when it comes to buying individual equities. You can even that out by investing your money in the entire market Ė think the Russell 3000 Ė and letting the chips fall on specific companies where they may.
Buy in Stages
Just like thereís no good way to predict which companies will bounce back, thereís also no good way to predict a market timeline for the next year.
At time of writing the stock market had begun to rebuild its value (climbing back to over 23,000 points). This market recovery might continue if investors gain steady confidence in the governmentís ability to fight the coronavirus and stabilize the economy. It might reverse in a period of days if investors change their mind about those factors. Thereís no good way to tell.
The best way to mitigate that risk is by investing in stages. Buy new investments on a weekly basis, perhaps, or every 10 days. Pick a schedule that works for you and stick to it. If youíre buying bonds, use a ladder approach. If youíre buying stocks, considering dollar-cost averaging.
Like all investing strategies, this will mean passing up on some opportunities in order to mitigate risk. You will not be able to time the market and flood all your money in at its low point. To compensate for that, however, you will mitigate the risk of market volatility. No one knows when the stock market will bottom out, so by investing steadily over a period of time youíre more likely to buy in when prices are good.
Right now is a difficult time for investors, and particularly for anyone who needs to begin withdrawing assets immediately or very soon. Retirees and families with children headed off to college will face difficult months ahead as they figure out how to adjust long-laid plans. For everyone else, however, with a little bit of patience and prudent budgeting, this does not have to be a financial catastrophe. Instead, it could be the foundation for significant long-term gains.
The Bottom Line
A bear market means that cash will be tight, but investment opportunities are there if you can pursue them without risking your emergency fund. Invest for the long haul, resist the urge to panic-sell and hold tight. The market will be back.