As investors, I hope you’ve heard many good reasons to stay on course and not abandon your long-term investment strategy in a market downturn. While this always holds true, this is a scary and difficult time for everyone. This time, both health and wealth are threatened and we can all feel the high emotions. Let’s talk about what you can think about and act on:  

Markets – Keep it in Perspective

The 11-year Bull Market has officially ended after the decline of the stock market reached more than 20% from the peak on 2/19. While nobody can predict how long the Bear Market will last or where the bottom is this time, we know this phase shall pass, just like any other Bear Market in history. Pandemics, like the diseases themselves, run their course, as will their impact on global markets.

Look at the chart below. The average Bear Market period lasted 1.3 years with an average cumulative loss of -38%. The average Bull Market period lasted 6.6 years with an average cumulative total return of 339%


The next chart below shows that stocks have generally delivered strong returns over one-year, three-year and five-year periods following steep declines. You’ve realized the risk, so you might as well stick around for the expected return.

In Chinese, the word for Crisis 危机, also bears the meaning of opportunity. So, what are the embedded opportunities during this crisis?

  • Buying Opportunity: If you have money on the sideline waiting to be invested, the stock market valuation is much cheaper than 3 weeks ago. It’s difficult to predict the bottom of the market. Therefore, if you are concerned about further falling prices, then setting some thresholds and using a “dollar-cost-averaging” strategy can spread the risk, as the market will continue to be volatile. If you are making contributions to a retirement plan or college savings plan, keep investing the money.  
  • Rebalance Your Portfolio: As equities fall and fixed income percentages rise in the portfolio allocation, let’s not forget the timeless discipline to rebalance: to “sell high and buy low”. 
  • Roth IRA Conversion: If your income tax bracket is low this year and you have an IRA account invested in equity at a lower valuation now, you can transfer securities “in-kind” to a Roth IRA. Pay taxes with money outside your IRA and let the investment grow inside the Roth IRA, tax-free. You might want to coordinate with your CPA to do tax planning on this.
  • Refinance: Yes, mortgage interest rates are going down again, around 3% for a 30-year fixed term at this point. You may want to reach out to a mortgage broker and discuss your options.
  • Review Concentrated Stock Positions and Legacy Stocks: As prices drop, so do the capital gain taxes. Now is a good time to replace some of your concentrated positions with more diversified funds.
  • Review Non-liquid Assets: If you are worried that your wealth is too concentrated in an illiquid asset, whether it is real estate or business, and have no desire or financial capacity to wait out an economic recession, it may be time to divest or diversify.
     
Should I change the course?

Ask yourself these four questions:

  1. Given the new circumstances, have my long-term goals and plans changed?

  2. Reevaluate your portfolio and risk tolerance. Is my portfolio out of balance and not well diversified? Did I take on too much risk which has pushed me to a breaking point?

  3. Will my job, business and income be impacted given the immediate threat of Coronavirus? If so, will I run into a cashflow problem getting through an economic recession?

  4. Do I have a major purchase coming up in the next 12-18 months but haven’t put away enough cash for it?

If your answer is yes on any of these questions, you might consider changing strategies. If no, then staying put is the best response. Remember two things: 1) With a balanced and diversified portfolio, only part of your holdings is exposed to stock market volatility. 2) If you don’t sell, the portfolio has only a paper loss and it will recover.

So what can you do and control to respond to this challenging time?
  • Prepare to work and study remotely. Get technology set up at home. Stock up on groceries and OTC medicine. Medical treatment for Coronavirus is only supportive. Hospitals and medical staff will be very overwhelmed if too many people get sick at the same time. Self-care is critical.
  • If you have loved ones who are elderly and have underlying conditions, help them stay safe. Deliver groceries and supplies to them to minimize their exposure to crowds.
  • It’s tax time. While you are collecting financial records, take a look at how much you are spending. If you notice any surprises regarding where your money went, think about how to pull back to be prepared for a prolonged market downturn.
  • Find some indoor exercise equipment that works for you and your family.
  • If you have kids, think about how to entertain them for a prolonged homestay.
  • Limit your time on media and TV news. If you need to know what is going on, limit your exposure to 1-2 times a day and read only from sources that you trust.
  • Spend more time relaxing and doing things you enjoy.
  • Avoiding stress helps build your immune system!
  • Lastly, reach out to your family and friends. We are all in this together and need each other’s support and caring.

At Silver Oak, our priority is to protect the health and well-being of our employees and our clients. We have set up systems for working remotely, and we will continue to be fully operational by offering phone and video-conference appointments in lieu of in-person meetings.

Hang in there and please know that you are not alone as we all navigate this uncertain time.

Sincerely,
Linda Cao
President, MBA, CFP®, CeFT®