What a difference 3 months makes. Back in January everything seemed fine. As we rolled into 2020, the global stock markets had just experienced a very strong year to finish off a very strong decade. In our last quarterly newsletter, I wrote: After a year where account balances increased sharply, it is natural to feel confident that we will continue to have good times going forward. Maybe we will. But it takes some effort to remember when the last time the markets were in turmoil. It will happen again, and the timing will be uncertain. I guess we found the turmoil, and it doesn’t feel very good. But it happened, so what can we do about it?
First, understand how you are feeling right now. This is a good opportunity to calibrate your investments with how well you are sleeping at night. The key is finding the middle ground where you are comfortable with your investments at all times - both in years like 2019 when the stock markets returned close to 30%, and in times like the last couple of months. Because the timing of terrible events like terrorist attacks, natural disasters, or COVID-19 is always uncertain and unexpected, there is no easy way to predict exactly when to take more risk and when to take less.
Second, it helps to mentally compartmentalize investments into buckets, because they serve different purposes. It’s all about when you plan to spend your money. Expenses over the next 1-2 years? Choose stable investments like FDIC insured bank accounts, Treasury bills, or short maturity Treasury notes. On the other extreme, for cash needs 10+ years out, you will likely be better off investing in stocks, which are more volatile in the short term but tend to increase in value more than cash and bonds over time. The point is that even though there is that one number at the bottom of your statement each month that stands out, it doesn’t tell the true story.
Finally, remember that time heals all wounds. When turmoil in the investment world is happening, we are thinking, How far is it going to go? How long is it going to last? and This time is different.
What we are going through now might last another month or (hopefully not) several years. But no matter what, throughout history the world has been very successful at solving problems, and we will do it again this time too.
Chart Source: Morningstar ®
Past performance is no guarantee of future results. Hypothetical value of $1 invested at the beginning of 1926, with taxes paid monthly. No capital gains taxes are assumed for municipal bonds. Assumes reinvestment of income and no transaction costs. This is for illustration purposes only and not indicative of any investment. An investment cannot be made directly into an index. ®2020 Morningstar Inc. All rights reserved.