Professor Erkis, The stock market has been highly unstable due to the coronavirus. Some of us have a little money invested in the stock market and we don’t want to lose it all. What should we do? The Hawk Staff.
Professor Erkis: I totally understand how you are feeling. The COVID-19 disease is a terrible thing. There are going to be business disruptions and it’s hard to predict how large the negative impact will be on the economy. I am hopeful that the spread of the virus will be contained soon, but it seems like things are going to get worse before they get better.
From the perspective of investing, I try to take a long-term perspective. The old finance adage is to buy low and sell high. But the huge daily losses push even the best of us to think about selling now. What I don’t want to do is to let fear get the best of me and sell at market lows. It’s not possible to predict the future, so all I can do is to look at recent market history to put the recent volatility into perspective.
In the past 20 years, there have been two other large market price declines. Using information from FactSet, from August 2000 to February 2003 (the so-called “dot-com crash”) the S&P 500 stock index decreased approximately 42% on a total-return basis. From November 2007 to February 2009 during the “global financial crisis,” the S&P 500 dropped approximately 50%. These downturns were very tough.
However, if an investor rode out these terrible periods and did nothing, each $1.00 invested in August 2000 would be worth $2.87 at close of business after the 7% stock market drop on March 9 (providing a reasonable average return of 5.50% each year for the 20-year period).
What this tells me is that over the long run, I want to have some money in stocks. But I understand that this may not be for everyone. Here are a few options that you can consider:
- Do nothing. FYI, it may help to stop looking at your stock portfolio for a while until the market stabilizes. The idea of this strategy is that things will recover long-term.
- Decide that you want to take some money out of the market to reduce your exposure to future losses. The problem is that it’s very hard to time the bottom of the market, so if you sell everything now, you might miss the rebound. Therefore, if you do decide to sell, I recommend selling over time and not all at once. For example, sell $2,000 each month over a five month period instead of selling $10,000 now.
- Buy more stock. This may sound crazy, but history shows that market downturns are the best times to buy. For example, $1.00 invested in the S&P 500 after the global financial crisis crash in February 2009 would be worth about $5.00 at the close of business on March 9, 2020. Of course, there is risk that prices could continue to move lower. To mitigate that risk somewhat, like the sell option above, buy over time and not all at once. For example, buy $2,000 each month over a five month period instead of $10,000 now.
It is a scary time, but history shows that the U.S. economy is strong and can recover from bad times. I hope this helps you feel a little bit better.
Anna Lubomirski: Losing money on stocks in such a short period of time certainly makes you feel a pressure to try to reduce your losses. However, I agree that it’s important to think of stocks as long-term investments. As college students, we have decades in front of us for investing and growing our wealth. What happens in the short-term with the coronavirus likely won’t heavily impact your long-term investment because the economy will have recovered by then. The bottom line is don’t panic, things will turn positive again when the virus outbreak is contained.
*Nothing stated in this column should be considered investment advice or an offering of securities. Stock investing has risk and you should do your own research before investing.
