Here are the thoughts we shared with clients following last week's steep stock market decline.
By David McPherson, CFP®
It’s been a tough week to be an investor saving for retirement. There’s no other way to put it. The coronavirus and its impact on the economy have triggered what is probably the scariest time in the stock market since the financial crisis that stretched from late 2007 to early 2009.
And rather than simply repeat the “don’t panic” mantra as you watch the market plunge, I want to put into perspective what it means for your portfolio and retirement savings. I will also use this as a chance to explain how we invest and why we do it that way.
The first thing to keep in mind as you consider the week’s events is that the “market” is not your portfolio. What I mean is that the daily 1,000-point drops we’ve witnessed this week applies to the Dow Jones Industrials Average, a narrow slice of the U.S. stock market as represented by 30 of the largest corporations in the country.
Yes, even broader measures of the U.S. stock market, such as the S&P 500 and the Russell 3000, experienced dramatic drops as well. But your portfolio is not only U.S. stocks.
Your portfolio holds a wide variety of investments including international stocks from developed and emerging markets, global real estate and, most importantly this week, a large allocation to conservative, high-quality bonds.
A typical Four Ponds client portfolio holds about 40% to 60% in stocks, meaning the remaining portion is concentrated in a mix of government, corporate and international bonds, all of which are up so far this year. The bond side of the portfolio is designed to add some stability during the down times.
Our bond portfolios tend to be very conservative with high concentrations of short-term, high-quality bonds. We avoid high-yield and long-term bonds that can produce higher returns but also carry more risk.
At times, it may feel like we're too conservative with our bond selections, but we’re using their stable nature to offset the risk taken on the stock side of the portfolio, produce modest returns and help us ride out times like these. That’s why when we get hit by a big market drop, I encourage clients to avoid doing anything rash and to stick with the investment plan we’ve developed.
The bonds won’t stop your accounts from falling in value during severe stock market drops, but they will help mitigate the losses and thus allow the portfolio to recover more quickly when stock prices begin to climb again.
For example, a typical Four Ponds portfolio holding 50% stocks and 50% bonds should be down less than half of the 11-percent decline in the Dow Jones Industrials Average since Jan. 1. That’s why I say the market is not your portfolio.
I don’t have the expertise to predict when the coronavirus outbreak will begin to abate, but I am confident that stock prices will recover at some point. That’s why it’s important to remain invested in stocks at an appropriate level. Recoveries tend to happen rapidly and without advance warning.
The key to successful investing is not timing the market, but rather time in the market.
For further thoughts on the current turmoil triggered by the coronavirus, here are a couple articles from Vanguard: Coronavirus toll includes tens of billions in lost growth and Beat the short-term market jitters.