Understanding Portfolio Declines During the Pandemic
The COVID-19 outbreak has erased 23 million jobs created since the 2007-2009 recession, and the 30 million mark is approaching. The financial storm fed by unprecedented negative economic activity created intense volatility among both the stock and bond markets. Navigating your portfolio during these challenging times can be very difficult. Your installation’s Personal Financial Management office can provide resources to help you understand historical trends in managing your finances during an economic downturn, recession, or even depression.
Portfolio declines are not losses unless you sell.
Many service members may feel pressure to sell or reallocate their investments in TSP and other investment accounts because of all the noise and chatter surrounding the current economic environment. They look at the losses and financial stress kicks in. They sell because someone else is selling or they sell or reallocate because they are nervous with all the red numbers. Seasoned investors know that you do not sell a stock just because the price is down. Seasoned investors follow the philosophy that successful investing is knowing when to buy.
One of the world’s greatest stock investor; Berkshire Hathaway CEO Warren Buffett says, “it's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Buffett is a valued investor who likes to buy quality stocks at rock-bottom prices in markets like this.
History has shown us the markets will bounce back.
Historical data makes clear that Mutual Funds investors have stayed the course through market downturns, volatility, and crises. The popular misconceptions about panicky fund investors don’t stand up to any scrutiny; in fact, mutual fund investors are a great source of stability to our financial markets.
- In the bear market of 1973–1974, stock-fund investors redeemed just 5.8 percent of those funds’ assets.
- In October 1987, the month of “Black Monday,” stock funds were only 3.2 percent of assets.
- When the tech bubble burst in 2000 and 2001, fund investors confounded run theorists by purchasing more stock funds, not selling off.
- During the financial crisis, from October 2007 to February 2009, stock fund outflows over that time were a mere 3.6 percent of assets.
Simulations indicate that exiting the market in order to avoid potential downturns will likely produce sub-par results.
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Using the market returns over a 24-year horizon, we show the historical probabilities of outperforming the market by 0, 10, 50, 100, 150 and 200 basis points (bps) per year.
- The probability outperforming the benchmark decays rapidly as the number of days out of the market increases.
- BLUF: Unless an investor has great skill and/or luck and the conviction to act on these insights, the most effective approach is to remain invested.
Missing out on the best days is easy.
There are compelling reasons why not to move your portfolio to cash.
- You’ll “lock in” your losses if you move your portfolio to cash when the market is down. Your advisor will earn commissions.
- Also you will have to decide when to get back into the market. Chances are you are not an expert market timer and either is your advisor. But he/she will still earn commissions
- You could fall short of your long term goals by missing the market’s best days.
What’s next?
Before you make any hasty decisions, here are some thoughts from three wise men who managed billions in stocks and managed portfolios such as mutual funds and ETFs.
“You get recessions, you have stock market declines. If you do not understand that is going to happen, then you are not ready, you won't do well in the markets.”
- Peter Lynch, American investor, mutual fund manager, and philanthropist
“Follow market trends and history. Do not speculate that this time will be any different. For example, a major key to investing in a stock or bond fund is its performance over five years. Nothing shorter.”
- John Marks Templeton, American-born British investor, banker, fund manager, and philanthropist.
“The most important quality for an investor is temperament, not intellect. A successful investor does not focus on being with or against the crowd. The stock market will experience swings. But in good times and bad…stay focused on your long-term goals."
- Warren Buffet, American Investor and arguably the world's greatest stock investor.
Do you have more questions about your financial portfolio or TSP? Contact your installation’s Personal Financial Management Manager for assistance and resources.