The markets call things like the coronavirus black swan events. That thing with a very small chance of happening, but with a big impact in terms of humanity, markets, and our head space. A lot of stocks have been sold in a very short period. The world seems uncertain, and that uncertainty is growing.
Markets hate uncertainty, and we know that companies won’t make nearly as much as anticipated this year. This naturally makes stocks worth less, but how much less? Unfortunately, it’s likely to take months before we see the real impact of the virus reflected in the data, and this is the information the market needs to price stocks. Until the actual impact to profits is known, the market will continue to wrestle with values.
Expect wild swings to continue in the coming weeks. The Fed has already made one emergency rate cut to assure markets, and while this has provided a small boost, cutting the Fed Funds rate doesn’t really get to the core issue, which is the massive slowdown of business and trade. The only long-term solution will be to wait for virus fears to fade, and for business to return to normal, which it will.
For long-term investors these things come and go. Long-term investors wouldn’t consider selling because they’ve seen the stock market return to normal following past black swan events after what always seems like a long time.
If you’re contributing to a retirement account that owns stocks, you’ll have the opportunity to buy throughout the dip, and enjoy more bang for your buck when markets return to normal at some point in the future. This is called dollar cost averaging, and it’s a powerful tool.
This is usually not the time to make major changes to your mix between stocks and bonds. If you own bond funds, they’ve enjoyed a nice run up as money has flowed into bonds from stocks. Bonds are typically where investors seek shelter during black swan events.
Selling a long-term portfolio only locks in losses. If you continue to do what you’re doing anyway, holding for the long term, you’ll enjoy the return to normal in the coming months, and your dividend reinvestments will be buying shares at a nice discount along the way. If you’re a long-term investor, you should consider dividend reinvestment, which is another powerful tool.
If you’re an active trader using margin and options to day trade stocks and industries you know little about, these are indeed tough times. We believe in a diversified, long-term, buy and hold approach to investing.
We’re here to help if you have questions about investments, or the current market environment.
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