Reactions to the financial markets between March 2020 and today…
“S&P 500 hits all-time high.”
“Apple’s valuation hit the $2 trillion mark, the first publicly-traded US company to do so.”
“Dow Jones Industrial Average gains back all of its losses during the year with 4 months to go.”
These statements wouldn’t seem out of place in the years 1999, 2007, or even 2019. Yet, all of these statements were true in August and September of 2020…5 and 6 months after one of the worst stock market crashes since 1929. In a recessionary economy, no less, at the end of a 10-year run of increasing stock prices.
To compare, below are a couple of examples of published economic news in March 2020, as the US entered a forced shutdown due to COVID-19:
The New York Times published an article on 11 March 2020 that stated, among other things: “The S&P 500 fell nearly 5 percent on Wednesday, while the Dow dropped nearly 6 percent. From its February high, the S&P 500 is down 19 percent, while the Dow is down 20 percent”.
On 15 March 2020, CNBC published an article that had these statistics: “The Dow Jones Industrial Average closed 2,997.10 points lower, or 12.9%, at 20,188.52. The 30-stock Dow was briefly down more than 3,000 points in the final minutes of trading. The S&P 500 dropped 12% to 2,386.13 — hitting its lowest level since December 2018 — while the Nasdaq Composite closed 12.3% lower at 6,904.59 in its worst day ever”.
Such market price drops impact economies across nations and continents, industries and businesses large and small. Here at home, they also impact individuals who have their retirement monies invested in mutual funds. “As of June 30, 2020, an estimated 43 percent of IRA assets were held in mutual funds, while the remaining assets were held in brokerage accounts or managed by banks or insurance companies”.
If you owned an IRA or worked with a money manager, your financial future was in serious jeopardy. What did you do about it then?
Here’s what the company I work most closely with, MassMutual, stated to its clients about steps to take during market uncertainty such as what March 2020 brought (published for clients on 17 March 2020):
- Volatility begets volatility.
- Equity markets are beginning to look increasingly attractive (relative to bonds).
- Focus on the long term (emphasis mine).
Personal financial planning is most effective when it’s focused on the long term, not the short term. With a long-term view, drops in the markets that look like the Grand Canyon today are seen as little more than divots. Looking at retirement income goals to achieve in volatile or recessionary times can be perceived as towering mountains to scale in the short term; in the long term, they’re nothing more than molehills, speed bumps, or whatever image best describes them to you.
Wealth is generally created by compounding things in an upward direction; the concept of compounding assumes not just that there is something to compound but that the biggest gains are made over longer periods of time, not shorter.
If you want to test this, I suggest the following experiment (I tested this myself using this compound interest calculator): Compare the gains of $1000 invested over 10 years at 5% growth rate with monthly contributions of $100 to the gains of $10,000 invested over 3 years at the same 5% growth rate with the same $100 monthly contribution. The $1000 investment yields $16,722.37; the $10,000 investment yields $15,359.25.
And if you want more voices than MassMutual’s regarding a long-term focus with your financial planning strategies, here are other voices from around the same time:
“Do stay the course. If you’re considering pulling money out of the market right now, know that this is the absolute worst time to do so. Buying high and selling low is the biggest mistake individual investors make. It may look bad now, but it will look worse if you sell at the trough and only buy back in when the market is up 10-20%”.
Teresa Ghilarducci, Senior Contributor, Forbes Magazine [17 March 2020]
“So what does all this mean if you have money invested in the stock market, particularly if you’re retired or nearing retirement? Does that age-old advice — not to panic, and just ride it out — still hold?
Short answer: yes.
Slightly longer answer: yes, mostly”.
Samantha Fields, digital reporter for Marketplace (an NPR podcast and digital publisher)[17 March 2020]
If this was true of a long term financial planning as the market volatility hit in March 2020, it’s still true today, given that we’re not out of the woods yet.
When I started writing this, (soon to be former) President Trump stated that no further economic stimulus legislation discussions with Congress would take place until after the November 2020 election, sending major indices lower. However, the numbers show the ongoing economic narrative to be a strong overall recovery with some key health-related milestones to meet.
If you need money from your retirement accounts to live daily, that’s another issue, one I would determine with your financial planner. But if you need to know how much your portfolios have changed in the past few days and how it will impact your ability to buy that beach home in your retirement, don’t sweat the small stuff yet. Instead, keep that long-term outlook.
Stay patient, stay calm, stay focused on the long-term. Your financial future depends on it.
