Monday March 23, 2020
You don't need to stand in line at Costco to buy stocks on sale. You can invest from the comfort of ... [+] PA IMAGES VIA GETTY IMAGESOver the past few days, I have received a surge of people asking if they should buy stocks now, or at some specific point in the future. A few people have asked if they should sell everything and invest in a lifetime supply of toilet paper, but I digress. For those looking to capitalize on the many investments currently on sale, this conversation begs the question, “When is the best time to buy stocks?” Put another way, “Is now a good time to buy stocks?” The answer will likely depend on when you will need the money, and how you plan to use the money.
Now, I’ll give my opinion to the opposite questions. “Is now the time to exit the stock market completely?” Simply put, the answer is no. “Will the markets drop further?” Probably. “Will we see extreme stock market volatility this year?” Highly likely. The people who typically see their financial futures damaged the most in a financial crisis are the ones who completely bail; you will see more examples of that further in this post.
Can Stocks Still Help You Build Wealth?When you are looking to build wealth over your lifetime, different staring points may bring better returns. That being said, the more time you have invested in the stock market, the better your chances of building life-changing wealth. If you set aside money every month and invested those funds into a diversified portfolio over your working career, you would have had a tough time not benefiting from stellar returns on your investments in the stock markets during the last 10, 20, 30, 40 and 50 years.When the news of the world turns negative, you may be tempted to stop saving or only stockpile cash in the bank. Currently, we have seen a dramatic drop in the prices of some of your most loved companies’ stocks. Of course, that means shareholders of those stocks have seen their account balances drop below their peak levels; you have likely your net worth affected by this pandemic. However, consider thinking of those losses in a different way. Now, all of those companies’ shares can now be purchased on sale. As stock prices decline, the odds of you having above-average returns going forward increases substantially. If you walked into Nordstrom and there was a 30% sale, would you buy less clothing? Ok! A few of you fashionistas out there won’t wear anything that hints of a sale, but for the rest of us, a lower price is typically a good thing.
An Easy Way to Start Investing During the COVID-19 Pandemic
For those of you who are just beginning to invest, perhaps start with your 401(k) at work. Set up an automatic contribution from your paycheck, into a diversified portfolio, and forget about it. Ok, don’t completely forget about it and try to increase your contributions over time. You will get a tax break on your contributions, and you may even get free money in the form of an employer match or profit-sharing contribution.
If you have a large amount of money sitting in the bank, and you are afraid the stock markets will go lower, break up your contributions. If possible, set up automatic contributions to your investment accounts so you won’t have to think about it. Consider breaking up that large amount of money into smaller amounts and then making contributions to your investment accounts over the course of several months or throughout the year.
One thing everyone needs to know about a bear market is that it always seems like the world is ending when you are in the middle of one. Time and time again, when recessions and bear markets occurred, the same thing always happened, they ended. When people seem to think a situation is hopeless, you want to still be invested. We saw back in 2009, that the stock markets started a long march upwards, well before the long standing effects of the financial crisis had ended.
When will the Covid-19 pandemic end? Who knows? But, I am confident that this too shall pass. We have been through wars, terrorist attacks, inflation, stagflation, deflation, SARS, Ebola, AIDS; the list goes on. Through all of that, people suffered; as a society, we always pulled through. This time should not be different.
One of the richest men in the world (Warren Buffet) has profited heavily from buying when everyone else is running for the exits. Many of those who have been wise enough to invest during the darkest days of modern history have ultimately been rewarded for their foresight and bravery. There’s no reason to think this time is different. Buffet has famously given this piece of wise investment advice, “Be fearful when others are greedy and greedy when others are fearful.” I will let you gauge the current public sentiment for yourself.
Who do you think will provide better-investing insights, Warren Buffett Bill Gates or someone who has never invested before? 2017 GETTY IMAGES
Thoughts To Help Weather The Coronavirus Crash
I should point out that investors make most of their money by investing during a bear market. While the last financial crisis may seem like eons ago, remember, we got through it and experienced one of the longest bull markets in history.
We have seen more day-to-day volatility in the stock market over the past few weeks than I think anyone is comfortable with. In the grand scheme of things, it really doesn’t matter much in regard to your chances of reaching financial freedom over the long term. That assumes the stock markets resume their upward marches as they have after every financial crisis we have faced in the past.
Fidelity recently studied its investors with the best returns. What it found may shock you. Investors with the best returns were either dead or had forgotten about their accounts. What investing wisdom can you derive from this information? Well, the lesson here is that setting up your accounts well and letting them do their things is likely the best way for most people to get the best investment returns. The more you mess with your investments, the more likely you are to make an emotional investing mistake, especially when markets get choppy.
Should I Move to Safer Investments?
You may be tempted to bail on stocks completely when something like the coronavirus happens. Research has shown that losing is more painful than winning. Vanguard gave some great examples of what happens when investors either stick with their financial plans or bail out of their balanced investment portfolios. It shared three examples of investors and their actions during one of the worst bear markets in history, the 2008-2009 financial crisis.
All three of those investors had $1 million in their accounts as of October 2007.
Investor 1- Let’s call her Beth. She worked with an amazing financial planner and stuck with her financial plan. She made back all of her money by mid-2010.
According to that example, Beth ended 2017 with around $1.9 million, using a 50% stock and 50% bond portfolio. By simply staying the course and riding the financial crisis, Beth nearly doubled her money.
Investor 2- We will call him Tony. He just couldn’t stand to see his accounts fluctuate in value every day. He found the down days to be especially painful. Eventually, he sold all of his stocks and moved to what he saw had done better during the crisis. He ended up with a 100% bond portfolio. The supposed safety from bonds came with a hefty cost. His account took around eight years to get back to even.
According to the example from Vanguard, Tony ended up even, at $1 million, by the end of 2017.
Investor 3- Donald. He wanted to make the smartest financial choice, so he pulled everything out of his investments. He hunkered down and put all of his money into the bank. With interest rates at all-time lows for most of the past decade, Donald never made back the money he lost. To throw a little more salt in his wound, the interest he earned at the bank did not keep up with inflation, and his purchasing power continued to erode more over time.
Donald fared the worst of the three investors. After selling in a down market, and going to cash, he had just $729,214 at the end of 2017, according to the Vanguard study. He ended up with only 38% of the account value as investor one, Beth, who stuck with her 50/50 portfolio.
There is a risk in using so-called “safer” investments. You may actually decrease your chances of fully funding a secure retirement. Most people, in all-cash, will actually see their chances of running out of money increase. It is nearly impossible to save enough money, and generate enough income, to fund a comfortable retirement using just Social Security and bank accounts.
Can I Get Out of The Markets Until COVID-19 Goes Away?
This is the tough part; the market will likely move up before there is a clear consensus that the COVID-19 virus has been contained. We will likely see more volatility in the coming weeks and months. Jumping in and out of the market may cost you taxes and fees, as well as missed opportunities when the stock turns positive again. Trying to time the market will also likely drive your investment returns down in the long run.
According to Franklin Templeton Investments, watching from the sidelines may cost you. Over the 20-year period that ended December 31st, 2019, if you stayed fully invested for that time frame in the S&P 500 Index (ignoring any taxes, fees, or trading costs), you would have earned 6.06%, per year. If you missed just the ten best days, your returns dropped to 2.44%, per year. It gets worse from there. Missing just the 20 best days, your returns were just 0.08% per year. While missing the 30 best days, your average returns plummeted to a negative 1.95% per year. For those who were in and out a lot, missing the best 40 days dropped their average returns to negative 3.82%, per year.
Hypothetically, let's translate that into real numbers.
Let’s assume two people invested in a 100% S&P 500 portfolio for that 20-year period. Each person had $1 million to invest.
Investor One only purchased an S&P Index fund and left it alone. This individual would have ended up with around $3,870,000.
Investor Two stressed out and went in and out of the S&P 500. This person would have ended up with a negative 3.82% return and $458,700. Trying to time the market not only cost this investor more than half of the initial investment, but it also caused this individual to miss out on more than $3.4 million in growth. WOW!
You don’t have to do it alone. Working with a fiduciary financial planner, at the very least, can help make all of this financial stuff less stressful. In all likelihood, having a well thought out road map to reach all of your financial goals will help you get there faster and easier. If you don’t know where you are going, how will you know when you have arrived? Once this coronavirus lockdown has passed, get out and enjoy life. Your investments should be just fine without your looking at them twenty times per day.
Be safe, stay home, and wash your hands.