By Chiaki Hirate
These are challenging times. Like everyone, you are concerned about keeping your family safe and healthy, and you’re doing your part to help protect your community from the effects of the coronavirus. And if you’re an investor, you must also address your financial situation. How should you respond to the current market volatility and recent declines in investment prices?
For one thing, try to avoid what many others seem to be doing: panicking. The market selloff may feel unsettling, but it appears to be driven as much, or more, by fear and panic than by economic or financial reality.
Uncertainty is high, but there are reasons – solid, objective reasons – that provide more confidence in the longer-term outlook, suggesting that conditions still warrant an eventual rebound. U.S. unemployment entered this situation near a 50-year low, with solid wage growth. We will see a temporary disruption to the labor market, of course, along with a decline in economic activity, but households entered this period in generally good shape. Furthermore, housing market indicators were moving upward and the decline in mortgage rates could add more strength. Also, the Federal Reserve’s recent interest rate cuts, taking short-term rates back near 0%, will support the economic rebound as the impact of the virus containment efforts eventually fade.
In addition, while further volatility and the potential for further weakness will likely continue, the steep drops we’ve already seen indicate that the financial markets have “priced in” the likelihood of a short-term recession, which may mean that the worst of the stock market pain has already been endured, though, of course, there are no guarantees.
First, though, it seems likely that the investment world will finally calm down only when the health situation shows signs of containment – and this will inevitably happen, despite the grim reports we are seeing these days. As a country, we have the motivation, the will, the solidarity and the resources to defeat the coronavirus and its effects, despite the pain and trauma it is now undoubtedly causing.
So, back to our original question: What should you do? Here are a few suggestions:
Remember why you’re investing.
Given the market decline, you may be tempted to change your investment strategy. But keep in mind that your financial goals, such as a comfortable retirement, are longer-term than the shelf life of the coronavirus. These goals, not today’s headlines, should guide your decisions.
Re-evaluate your risk tolerance.
The recent volatility provides a good test of your ability to weather short-term swings in your portfolio. If you’re having a hard time coping with these losses, your portfolio may be positioned too aggressively for your risk tolerance. If so, you might want to adjust your portfolio mix to include more fixed-income securities, which can help provide more “downside” protection. However, this would also affect your long-term growth potential.
Look for buying opportunities.
Stocks are now at their most compelling values in more than a decade – in other words, there are plenty of compelling investments out there. You can find many high-quality investments at very good prices, so you may want to consider taking advantage of the opportunity.
These are trying times for all of us. But as an investor, you’ll help yourself greatly if you keep the situation in perspective, take a long-term view, evaluate your own risk tolerance and be receptive to new possibilities.