SAN DIEGO — As the coronavirus continues to spread, its effect on the market is becoming more and more noticeable. News of increased cases, decreased travel, quarantines and more dominate the headlines. Is it time to panic, as the various headlines seem to imply? No! Panic is an emotion, and we humans tend to make wrong decisions when we’re in an emotional state. So, don’t panic! Just as the market is volatile, so are emotions. Don’t let your emotions run the show!
The market is unpredictable. There is no way to know what it will do in the future. We have no control over it; we know this. Even if we were certain the US market would plunge at opening, would that mean we should sell and lock in the temporary loss to date? Then, could we predict exactly when the market would rebound to time when to jump back in? Of course, the answer is no to both questions. It seems trite to say that we should stay the course. Yet, that is still the best advice.
As happens with most market reactions, the market will likely continue to be volatile in the short-term – sometimes in the extreme! However, similar to SARS and other epidemic-type events, we can expect the markets to stabilize and have a positive return in the long term.
So, how should you react? My broken record says “Stay the course. Rebalance. Harvest tax losses.” Asset allocation is your best protection in the short term as well as the long term. When prices drop in one segment of the market, rebalancing pushes you to buy more – essentially taking advantage of bargains. Harvesting tax losses means selling loss positions to capture tax benefits and simultaneously replace those positions with a similar investment. Your portfolio will remain fully invested while you stock up on future tax benefits.
Whatever the market is doing, your portfolio continues to generate income in the form of interest and dividends. The paper value at any particular point in time is only meaningful if you sell. Investing works when you have a long-term perspective. Remember that volatility is the price you pay to earn more than bank interest rates in the long run.
Of course, all of this is easier if you have a qualified financial advisor. Your advisor will stay on top of economic events, changing tax laws, and your needs. Your advisor will also review your portfolio on an ongoing basis – to see when rebalancing is required, cash is needed or a tax loss harvesting opportunity exists. Finally, your advisor can add value to your returns by utilizing well performing, low cost institutional funds and taking advantage of every possible tax savings strategy. If you don’t have a financial advisor, be sure to look for a Registered Investment Advisor, who is required by law to be a fiduciary – putting your interests first! To find a fee-only advisor (one who doesn’t sell products or receive commissions), visit this website.
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Sheryl Rowling is a certified public accountant, personal finance specialist, and principal of Rowling & Associates. She may be contacted via sheryl.rowling@sdjewishworld.com