U.S. stocks fell again on Friday, ending another volatile week, as coronavirus fears outweighed central bank and government attempts to support the economy. The S&P 500 index fell 4.3% on Friday, and is now down 31.9% from its February peak.
“The problem is until the market sees some evidence that we’ve got the virus under control and can get back to business, there isn’t going to be a lot of confidence to buy, so the riskier/less liquid the asset, the weaker it will be,” says Kathy Jones, Chief Fixed Income Strategist for the Schwab Center for Financial Research.
“The volatility may be uncomfortable, but it’s natural when there is little confidence in the outlook,” says Jeffrey Kleintop, Schwab’s Chief Global Investment Strategist. “The market has nothing to hold on to in order to steady it. We don’t know how weak the economic data will be or how long a potential recession could last. Companies can’t give any credible guidance on earnings. And while the market may bounce on stimulus announcements, it’s unlikely to bottom until we see the peak in new virus cases, and we don’t know when that will be.”
What investors can do
Stocks are well into bear-market territory (that is, down 20% or more), and that can be scary for many investors. It’s natural to want to do something, but Schwab experts say investors shouldn’t react based on emotions. However, here are some steps to consider:
1. Rebalance your portfolio
“There is no cookie-cutter answer to what investors should be doing,” says Schwab Chief Investment Strategist Liz Ann Sonders. “If you are a disciplined longer-term investor that has a diversified strategic asset allocation plan, you could consider more frequent rebalancing tied to how far asset classes have moved relative to [your] longer-term targets.”
Rebalancing is the act of selling some investments and buying others in order to return your asset mix to its original targets. Because markets continue to be volatile, Liz Ann suggests rebalancing gradually instead of doing it all at once.
“Consider taking a dollar-cost averaging approach both on the ‘add’ and ‘trim’ sides, versus picking a particular day to make adjustments,” Liz Ann says.
2. Take your personal circumstances into account
“For the average investor, the best course of action depends on personal circumstances,” Kathy says.
For example, how soon will you need the money in your investment account? If you need money in the next few weeks and months, then you may need to sell some assets to raise cash. To lessen the impact of selling on your portfolio, you may want to harvest tax losses, Kathy says. If you have some investments that have done well, you might want to take some capital gains.
“If you don’t need the money for a few years, and your investments are consistent with a longer-term financial plan, then your best course of action may be no action,” Kathy says.
If you’re uncomfortable with market swings, you may want to cut back on some riskier investments and move that money to Treasuries or bank certificates of deposit (CDs) to reduce volatility, Kathy says.
On the other hand, “if you’re someone who is looking for opportunities, then the recent selloff in many asset classes can be a potentially good opportunity,” Kathy says. “However, be sure that you take into consideration the size of your allocation and your time frame. Keep allocations to risky assets small in periods of high volatility, and be prepared to hold them for an extended period of time.”
3. Don’t abandon your plan
If your long-term financial plan includes stocks, don’t abandon it because of short-term market movements. Sidelining yourself now with the intention of getting back into the market later could be costly.
“We can see this looking back at the last global recession,” Jeffrey says. “Eleven years ago [on March 9, 2009], the stock market bottomed following the global financial crisis. Yet there was no signal that day that it was all over. There was no official announcement or reports of improving economic data. Surveys at the time and for weeks and months afterward showed that most people thought the worst was far from over. But by June 1, less than three months later, stocks had climbed 41% from the low of March 9, 2009.”
When markets rebound, they often tend to do so quickly, and investors waiting for an all-clear signal to get back in can miss the rebound.
“There was a lot of dust still obscuring the view of many in the spring and summer of 2009, yet stocks marched higher, and many looking for a signal to get back in missed out,” Jeffrey says.
Important Disclosures
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market or economic conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.
Investing involves risk including loss of principal.
Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. For more information on indexes please see www.schwab.com/indexdefinitions.
Diversification, asset allocation and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets. Rebalancing may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events may be created that may affect your tax liability.
Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Lower rated securities are subject to greater credit risk, default risk, and liquidity risk.
The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.
© Charles Schwab & Co.
© Charles Schwab
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