Fear is one of humanity’s most basic feelings and one of the most powerful psychological factors that affect thought process. In its most basic sense, it is a primordial response designed to preserve life. It is so strong that the power of fear can sway and distort thought processes to swiftly overrule intelligence. People are knocked off their feet and will do anything to feel safer. One doesn’t have to look much further than the recent run on food and toilet paper. As the fear of the global pandemic spreads, the desire to maintain control and safety caused otherwise logical people to abandon rational thought and hoard goods without regard to the needs of others.
Fear has been a powerful sales tools throughout history. There are accounts of savvy businesspeople that capitalized on fear in the Old Testament to manipulate people for their personal gain. Unfortunately, nothing has changed. The news is full of 24/7 coverage of the Coronavirus. You simply can’t get away from it. As many now know, the media no longer brings an unbiased view of events. Everything is sensationalized to help sell their product.
The danger and healthy respect this virus deserves should not be minimized. A swift and coordinated response is needed to flatten the curve. Fortunately, other countries have shown us that this virus is controllable when proper restrictions are put into place. Although we are not out of the woods and cases are expected to rise, the US has started to do so and that is the end of the beginning.
The panic that traditionally comes with a bear market has not yet reared its ugly head. As the fear of the virus subsides and people divert their attention to picking up the pieces, this will be the next concern. No one likes to lose money and the natural instinct is to reduce the source of the pain. This will lead to bad investing behavior and decision making that is not fundamentally sound. Although this may feel good, it will cost you a significant amount of money in the long run.
While Chicken Little is out trying to convince people that the sky is falling, it is helpful to stick to the fundamentals. Although the virus is a serious concern, do not let media hype or empty toilet paper shelves stoke the fire of fear inside you. Decades of financial science and long-term investing principals have not changed and remain a strong guide. The following portfolio recovery action plan will keep you on track and make sure you are not part of the significant group that will be permanently affected.
Rebalance: As the value of stocks and bonds fluctuate, the original allocation target of the portfolio will become out of line. Rebalancing is the process of returning the portfolio to the original target allocation. It is a forced way of selling what is high to purchase what is low. As opposed to doing this at a certain time of the year, rebalance based on percentage drift. Consider a variance trigger of 6-7% before rebalancing.
Review Risk: Maintain the current risk level or consider increasing the risk in your portfolio. The stock market is one of the few things that no one wants to purchase when it goes on sale. This must be cautiously approached, however. Money that is needed in the near future should not be invested as the market is wildly unpredictable in the short term but incredibly predictable over time. At the very least, investors should have 4-6 years of potential capital needs in safety. This prevents the forced selling of stocks at an inopportune time to meet needs.
Tune Out the Noise: It’s hard to determine what headlines are important and what is just noise. Working with a fiduciary can help you determine the difference and create an overall plan to achieve your goals in the most efficient way possible. This helps maintain a long-term, goal-focused approach to limit short-term decision making.
Invest Cash: For those fortunate enough to have cash that isn’t needed for 3-5 years, this could be the opportunity of a lifetime as stocks are 30-50% less than they were 6 weeks ago. Although it’s tempting to take a wait-and-see approach, history favors the bold.
Embrace Uncertainty: Uncertainty is the part of investing the creates opportunity. The current state of fear has created significant market mispricing in some investments. With skillful analysis, areas of high reward with a disproportionately low level of risk are available.
Reduce Discretionary Spending: Withdrawing money from a portfolio during a correction eliminates its ability to recover short term losses. Although some of this can’t be avoided if it is covering basic needs, consider delaying non-essential spending until the market recovers some of its losses. Traditionally, markets start to recover quickly after the uncertainty that caused the decline is alleviated.
At MBM Wealth Consultants, we are committed to the fundamentals and helping our clients maintain discipline. We appreciate the continued trust of our clients. Please monitor your email and connect with us on social media for continued helpful information. Share this with family and friends so that as many people as possible can benefit.
