The markets finish February in turmoil with the Dow setting at a negative 11.98% year-to-date, the S&P 500 setting at negative 9.33% and the NASDAQ setting at negative 5.77%.
Following a volatile January, the markets set an all-time high February 19 but then the Coronavirus gripped headlines worldwide and the markets took a dive with the fastest 10% drop in history. Globally, stocks wavered as investors weighed the concerns about the economic impact of the outbreak against hopes that central banks will take steps to stabilize the markets and protect growth.
There is little doubt that the economies around the world will slow sharply as governments attempt to contain the coronavirus epidemic, although the scale of the setback is highly uncertain. Already the virus has cratered the China Manufacturing Index and expectations are that inflation may actually run into negative territory as a result of the slowdown.
As the markets drop, what is your strategy? Do you add more money to your investing account, hold steady, or yank your money from the market? Most investors are poor judges of their own risk tolerance, feeling more risk resilient when the market is sailing along and becoming more risk-averse during periods of sustained losses like the ones experienced lately. If this is happening to you, then you are injecting emotion into a carefully laid investment plan, which generally turns out to be a mistake.
Remember Peter Lynch? Peter was the manager of the Fidelity Magellan fund who averaged 29.2% returns from 1977 through 1990. Did you know that Peter’s average investor only averaged slightly over a 3% return? How can that be? Most investors took their money out of the fund and out of the market during volatile times, waited for things to ‘calm down’ before putting their money back into the fund, thus they missed the days where the market bounced back because they were on the sidelines.
How can you take steps to weather the inevitable volatility? First, focus on your time horizon. If you have a relatively short time horizon of 3 years or less, you probably should have little or no exposure to the stock market. If you have a mid-range or longer time horizon of 3 years or longer, then know that this too shall pass. Own a diversified portfolio with stocks, bonds, and other assets such as real estate, keep it simple and know that you will be just fine.
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