What a roller coaster ride that investors have been on!
Heading into February, stocks continued their upward trend, adding to 2019's terrific gains. The threat from coronavirus was not at the forefront.
The S&P 500 peaked on February 18th and by March 22nd, about a month later, dropped 35% as the health and economic impact of the crisis began to dominate the news and our lives. We saw gut-wrenching volatility, with daily losses of 5% and more.
And just as quickly, sentiment changed. A little more than two months later, stocks climbed back, with gains of 36% from the bottom. This time, the 5% daily moves were on the upside.
Here we are at the beginning of June, with the S&P 500 down only about 10% from its previous high.
Many investors, while appreciating the comeback, remain skeptical that it will hold amidst the devastating economic impact of the lockdown. But others point to hopeful signs of recovery as businesses reopen, as well as prospects for a vaccine down the road.
What do we know for sure? We’ll see more of those two old companions which always accompany investors on their long-term journey - Uncertainty and Volatility.
But it is a good time to look back and remind ourselves of lessons that we’ve learned, or re-learned, over the last several months. Here are a few:
You can be disappointed but not surprised.
Going back to 1926, stocks have gone down about 1 out of every 4 years. It wasn’t all that long ago, during the Great Financial Crisis of 2008 - 2009, that stocks dropped about 45%. So it’s happened before and it will happen again. But over the long-term stocks have generated strong returns. During the last 15 years U.S. stocks have annualized at about 8 1/2%.1
You get paid for taking on risk.
Stocks offer higher expected returns than cash or bonds precisely because they have higher risk. Those extra returns are called a “risk premium” and represent the added amount investors get paid for taking on the inevitable downturns and uncertainty. If stocks didn’t go down, there would be no risk and no added returns.
You have to have a plan.
An investment plan means having a mix of cash, stocks and bonds that allows you to sleep at night, even in the midst of a downturn. It also means having enough in cash or bonds so you don’t have to sell stocks at fire sale prices because you need the money for expenses.
You don’t have to know what’s going to happen next in the market.
The good news – nobody else knows either. Markets aren’t always perfect but you’re much better off assuming the market is getting it right than trying to outguess it. Stick to your plan and think long-term.
The most important lesson.
Nothing counts more than your health. Please stay safe.
We’re all looking forward to better times ahead.
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