Please Stay Seated
With all the changes to our way of life caused by the economic shutdown and social distancing and thousands of people who are sick and dying, the stock market isn’t the world’s most pressing problem. Yet a natural question to ask is: “Considering the significant effect the coronavirus is having on the economy and the market, what should we do about it?”
Many factors influence stock prices. Although major events and stock market movements may be related, it can be challenging to determine correlations. Also, after good or bad news, stock prices may not move in the direction that investors expect. It’s not enough to identify major events in advance, you also must accurately predict how markets will react.
If there were no uncertainty regarding future events and the impact on stock prices, why would investors earn a return greater than the risk-free rate? While major events and their unknown impact on stock prices create uncertainty for investors, the uncertainty is a major reason why investors earn a return.
Investing in the stock market can feel like riding a roller coaster. Both have a lot of ups and downs, twists and turns, some very large and frightening. You would never consider getting out of your seat on a rollercoaster in the middle of a very thrilling section of the ride. Instead, you would hold on tight and stay in your seat. Likewise with the market. Through this bumpy time of the market, continue to follow your investment plan. Maintain your global diversification, hold on tight, and stay in your seat. Both a rollercoaster and the stock market are always moving forward. Disciplined behavior in both environments will help ensure a safe and successful ride.
Dimensional Fund Advisors has studied market returns after a sudden market downturn. The results of this study can be seen at https://bit.ly/2A332iP and are summarized below:
A broad market index tracking data since 1926 in the US shows that stocks have tended to deliver positive returns over one-year, three-year, and five-year periods following steep declines.
Cumulative returns show this to striking effect. Five years after market declines of 10%, 20%, and 30%, the compounded returns all top 50%.
Viewed in annualized terms across the longest, five-year period, returns after 10%, 20%, and 30% declines have been close to the historical annualized average over the entire period of 9.6%.
Sticking with your plan helps put you in the best position to capture the recovery.
We are grateful for the relationship we have with you and appreciate the trust and respect that we share. Please feel welcome to contact us for any and all reasons as we get through this time together.
You should not assume that any discussion or information contained in this publication serves as the receipt of, or as a substitute for, personalized investment advice from FirstWave Financial. A copy of the FirstWave’s current written disclosure statement discussing our advisory services and fees is available upon request.