Can we call it a bear market, even if the stock market hasn’t plunged by 20 percent from its recent high yet? Let’s let the experts quibble over the definitions – because regardless of what they call it, some investors are panicked.
It’s not just stocks that are getting clobbered, of course. Oil prices crashed overnight, and some Treasury yields have plummeted to all-time lows, as investors across the world seek a safe haven in U.S. bonds. International stocks are tanking, too.
“The uncertain economic impact of coronavirus continues to grip markets, with stocks, commodities and interest rates all dropping sharply,” says Greg McBride, CFA, Bankrate chief financial analyst. “Markets hate uncertainty and there is a ton of it currently in play.”
We all know that panics are some of the best times to snap up long-term bargains, but they’re also the best time to have your portfolio crushed by a steamroller permanently if you make the wrong move.
So is it time to buy or time to sell? Either way, here’s what you can do to avoid regret tomorrow.
1. Avoid plunging in recklessly
Fortunes are made in a panic but probably more frequently lost. The only way you’re going to avoid your own financial demise is to act calmly and prudently. While it may feel heroic to jump into the fray when everyone else seems to be selling, discretion is the better part of investing.
Investors may have been conditioned to buy the dips after an 11-year-long bull market, but the trading action of the past few weeks isn’t any old dip. It’s verging on a full-on panic. So the market isn’t likely to recover immediately, and we could have serious ups and downs over the next weeks and months, as the full economic impact of the coronavirus becomes apparent.
If economies worsen from here, it could lead to a recession, with stocks likely to fall further. If global economies take a hit and then improve, stocks may rally later. But with all the uncertainty in the market now, you should expect to continue to see volatility.
So if today’s prices look good to you, just realize that tomorrow’s prices may, too. Feel free to buy more, but if a better deal comes along in a few weeks, you may feel that twinge of regret. However, if you go all-in, you’ll probably get greater pangs of regret at lower prices and be unable to take advantage of that future buying opportunity.
By the same token, you probably shouldn’t panic and completely exit the market either. You may have taken some nasty lumps already, but it’s not clear where the bottom of the market is. That uncertainty is what really scares the market. And if the market rebounds sharply, selling at the bottom to avoid short-term pain will feel even worse.
2. If you can’t hold for at least three years, don’t buy
If you buy stock during this panic and the market plunges further, and you can’t hold on to your positions, then you should simply stay out of the market now. The reason for not holding on could be anything: temperamental (you got scared) or financial (your broker issued a margin call), or something else entirely. But the key point remains: if you can’t hold for years, don’t buy.
As an asset class, stocks offer the highest potential return, but investors have to be willing to hold on during periods of massive volatility, like we’re experiencing now. And experts typically recommend that investors be able to hold a position for at least three years in order to protect against a stock’s short-term movements, allowing the business performance to move the stock.
Don’t forget that while you have every intention of holding on to your stocks, an unforeseen consequence can emerge. Can you continue to hold your positions in that type of scenario? That’s why it’s important to hold emergency cash – it can help you stay on track short term as well as long term.
If you need the safety, keep your money in a cash account such as a high-yield CD and stay away from the market until things settle down and the outlook is clearer.
3. Keep some powder dry
To take advantage of whatever the market brings you, you’ll want to have some dry powder – cash – available. Cash has the highest optionality of any asset, meaning you can do whatever you want with it. Unlike a stock or bond that may decline in value, cash can maintain its value (at least in the short term), giving you a huge advantage when other investors are strapped.
There may come a time when stocks move down relentlessly for weeks, and with cash on hand you can take advantage of that move without having to sell other assets to raise it.
So you can invest money today, tomorrow or the next week, but make sure you’ve always got some money in reserve so that you’re able to buy a little more when stocks go on sale.
4. Meet any potential margin call – now
If you’ve taken any margin loans, now is the time to figure out how to pay them back or at least reduce them. A margin loan magnifies a stock’s price moves, increasing the gains and amplifying the losses. So when the market is experiencing a full-on rout, it can be an important move to reduce your risk and own only what you have money for.
Then comes the hard part: figuring out what you want to keep and what to jettison. If you want to be a long-time owner of a company, then you might consider keeping its stock, even as it’s plummeting. If you want to hold onto a stock that’s fallen, it means you’ll have to lighten other positions or otherwise send cash to your brokerage to hold the position.
If you hold other positions that haven’t fallen much, such as bonds, you might consider liquidating those in order to maintain a stock position while reducing margin.
5. Still saving for the long term? Keep adding
If you’re able to think long term and won’t need your funds for a decade or more, then you’re sitting in the strongest position here. Now is probably not the time to do anything except add more incrementally. Keep adding money to a well-diversified basket of stocks, like a Standard & Poor’s 500 index fund, via your regular employer retirement plan (a 401(k), 403(b) or similar).
If the market really dips, you could also consider buying even more in an IRA or your regular taxable account. The longer your time horizon, the more you’re going to be able to see this fall and any subsequent declines from here as an opportunity to build long-term wealth.
A dip can also be a good time to diversify, too. Had your eye on a stock that always looked too expensive? Now might be the time. But you can also add to non-stock assets too. The safety of CDs can be a relief after watching your portfolio dive. By diversifying your portfolio, you can reduce risks and increase your overall return, and that’s a welcome addition to any portfolio.
6. Realize you’ll probably have some regret
While it might be easy to plan things out when markets are calm, it’s tougher to act on those plans. Everyone gets nervous around the potential for losing their hard-earned savings. So despite your best actions, you need to realize that you’re going to have some regrets. There will be some stock that you should have bought, or one that you should have sold.
The key is not to make every decision perfectly correctly. Not even the legendary investors do that. The point is to take the correct general approach to the panic and do the next right thing.
Stocks as a whole have rebounded time and again, though things seemed dire at the moment of crisis. The Dow Jones Industrial Average fell by 22.6 percent on a single day in October 1987, its worst ever. For those who could buy at the time, it turned out to be a great opportunity. For those who sold or had to sell, it was a moment of intense loss. Since then, stocks have bounded many times higher.
But even if you make the smart moves, you may feel stupid at least for a while. There will always be a stock you should have bought or sold, a smart move you should have made. Instead of focusing on the small regrets, remember how to avoid the big ones and forgive yourself for the tiny ones.
Investing is tough even in the best of times, so it’s important to keep focus on what works in the long term — holding a well-diversified basket of stocks through thick times and thin ones (and buying more when times are thin). While it might not be time to buy today or tomorrow, the biggest regret in the long term will likely come from not owning a piece of America’s best companies.
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