Investing During COVID-19
April 16, 2020
SC&H’s Key Takeaways
- Have a personal financial plan that guides your investment strategy.
- Attempting to time the markets is dangerous. Historical evidence shows it’s not an effective strategy.
- Stay invested to capture the best days of the market. Missing out on the best days of the market can have a detrimental impact on your long-term portfolio returns.
Chris DeBlanc, Financial Advisor, SC&H Financial Advisors, has been receiving an influx of investment questions from individuals asking what to do with their investment portfolio. “Should I buy? Should I sell? Should I cash out and wait it out on the sidelines until this whole Coronavirus mess works itself out?” You may have asked yourself the same questions. They are legitimate questions. But their essence boils down to timing the markets.
Timing the markets
From our perspective, market timing does not work. No one knows the best time to buy or sell an investment. No one knows the optimal time to get in or out of the market. 92% of all active money managers failed to outperform the S&P 500 over a 15-year time period. So, if the pros can’t do it, it’s unlikely you’ll find success at it.
Time in the market
Time in the market is more important than timing the market. You may have heard this before, but it’s worth repeating. Sure, being fully invested during this period of market turmoil may subject your portfolio to the wild swings and potential market declines. But it also allows you to participate in the rebounds that may follow.
During this current crisis, we saw some of the largest single-day drops in recent history.
Two days during this crisis ranked in the top ten worst days in S&P history. Circuit breakers were tripped. Trading was halted. Investors were running for the doors. They sold and locked in their losses. However, for those that did not sell, those large declines were followed by some of the largest daily percentage gains in recent history.
Two days ranked in the top ten best days in S&P history. Unfortunately, people who sold on the worst days and missed the best days may have had a detrimental effect on their portfolio’s long-term performance.
Missing the best days
Below is a chart of the S&P 500 Index returns from 1999 to 2018. If you were fully invested in the S&P 500 Index and missed 10 of the best days in the S&P 500, your annualized performance would change from 5.62% to 2.01%. If you missed 20 of the best days or more, you would have a negative return in the Index. This chart shows the importance of staying invested so that you capture the best days.
The moral of this story is that if you want to optimize your portfolio’s performance, it’s best not to get off the rollercoaster in the middle of the ride.
Maybe you sold and locked in your losses. Maybe you didn’t sell, and you’re just enjoying the ride. Or maybe you have cash to invest and aren’t sure what to do. Whichever situation you find yourself in, the first step you should take is to develop a personal financial plan.
Get a personal financial plan
A personal financial plan does several things. First, the plan shows your current financial situation. Second, through the financial planning process, you define your financial goals. Where is it you are trying to go, or what it is you are trying to accomplish? Once you know where you are and where you want to go, the financial plan provides a roadmap to get you from where you are to where you want to be within the constraints of your timeframe and resources.
It is this roadmap that guides the investment strategy. It tells you how you came up with the investment strategy, why you’re investing, and what you hope to achieve with your investments. Without a roadmap to guide the investment strategy, you’re chasing investment returns. The fourth thing the financial plan does is that it keeps you on track in the face of uncertainty.
Are you financially on track?
If you’ve ever flown on a plane, it may be disconcerting to know that the pilots are off course 95% of the time. However, they land at their destination with a much higher accuracy. How is that? Well, as they move along their flight path, the pilots assess their current position in relation to their desired destination. Then they make small, 2-millimeter adjustments to get the plane back on track. A 2-millimeter deviation on a flight path from Washington DC to Hawaii could mean the difference between landing in Honolulu, Hawaii, or Hanoi, Vietnam. The same holds true for your financial goals.
Are your financial goals off track because of the COVID-19 pandemic? Is your retirement now in question because your investment portfolio has taken a significant hit? Are you now wondering how you are going to pay for your kids’ college education? It could be that these goals now seem out of reach. Or it could be that the security of your financial future is now in question. They may very well be. But the good news is that you may just need a financial advisor to assess the situation and help you make a few adjustments to get you back on track.
At SC&H Financial Advisors, we have a team of financial advisors who can work with you to develop a personal financial plan, develop an investment strategy, and help you make the adjustments necessary to get your finances back on track. We are here to help. Contact us today to speak with one of our advisors.
Advisory Services offered through SC&H Financial Advisors, Inc. SC&H Financial Advisors, Inc. is a wholly owned subsidiary of SC&H Group, Inc.
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