The original version of this article appeared on Forbes.com. You can access it by clicking here.
Wall Street thrives on fear. That’s something I’ve said throughout my career. But it’s never more true than in times of economic turmoil when investors act on emotion instead of reason. Unfortunately, when knee-jerk decisions are made, millions of people end up transferring their wealth to the investment industry, rather than “protecting” it, as they so desperately want to do.
As I write this, we’re living through a scary time. Millions of Americans in the hospitality industry have lost their jobs. In a recent survey of 1,000 Americans from LendEDU and Pollfish, 30% of respondents people had either lost jobs or had their hours cut, and 57% of respondents were worried about job security.
If that weren’t enough, many parents are now trying to cope with this uncertainty while working from home and homeschooling their children at the same time. The market has been volatile for weeks, and on a daily basis, we have no idea whether to prepare for a 10% uptick, or for trading to be halted in order to stop extreme losses. And the black cloud hanging over all of this is that no one — not a single scientist, not a single politician — can tell us how long the COVID-19 crisis is going to last.
But this is a good time to remind ourselves that there is always something to worry about. There are always scary times, and the only thing we can really ever depend on is change. In my opinion, the secret to investment success during these times is to do exactly the opposite of what your emotions are telling you. One of my favorite investing rules comes from Warren Buffett: “Be greedy when others are fearful, and fearful when others are greedy.” It may be hard to do at first, but once you’ve internalized it, you position yourself to make money while others count losses.
Historically, we’ve seen plenty of tough economic times: 1929, 1987, 2001, and 2008 are the ones that live most prominently in our collective psyche. You didn’t need to have lived through these events to get a sense of how harmful they were. Thanks to twenty-four-hour-a-day financial news from CNBC, Bloomberg, Fox Business and many others, we’re treated to a parade of talking heads warning of the horrors awaiting us around the next corner.
But in an era where we’re getting minute-by-minute updates on all our various screens, it’s more important than ever to focus on the big picture and the long haul. Now is a great time to calmly assess your financial future, revisit your planning goals, and focus on how to transform these events into opportunities for growth, progress, and achievement.
Yes, this last month’s market correction has cast an enormous cloud of uncertainty onto many Americans’ financial futures. According to the LendEDU survey, 63% of respondents were worried that Coronavirus and its impacts will seriously damage their retirement savings and plans. In my opinion, the best thing for you to do with your stock market investments right now is to hold onto them.
A good historical example comes from the market crash of 2008. If you bought 100 shares of Apple stock on January 1st of that year and held it until January 20, 2009, you would have seen a near 60% decline in your investment. But if you held through that bottom until today, you’d be sitting on a 955% gain.
Of course, being a stockholder comes with risk — and it’s because of that risk that stocks have historically commanded a price and return premium over bonds. It’s been so long that stocks have fallen that many investors may have forgotten that relationship. Now is, unfortunately, the moment when the bill for that risk premium has come due. And while it might feel more comfortable to skip out on the tab by moving from stocks into bonds, I’d strongly caution against it with interest rates on government securities nearly in negative territory. Your best course of action right now is to stay the course — in stocks.
Unfortunately, I’ve found over the years that most people's investment portfolios aren’t connected to a financial plan that will allow them to stomach market volatility. The time to prepare for a market decline is before it happens...not while it’s occurring. If you’re scared about “what to do” now, I’d recommend talking to a professional financial advisor. At my firm, Capital Asset Management, we invest independently, avoid trends, and hire professional money managers who build portfolios that will weather even the worst storms during scary times. We know that slow and steady really — truly — does win the race. And that’s not just me talking. I’ve got history to back me up.
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