Coronavirus and and the Market Correction

February 28, 2020

The Coronavirus and How the Press LOVE to Cause a Panic
From the press to the quick retreat of our stock markets this week, there’s been a lot of negative news. And that news is fixated on the Coronavirus. Yet, the risk to you and me, in contracting the Coronavirus, is quite small. And this is not something I’m declaring without merit. Here is a quote directly from the CDC, effective February 27, 2020:

“For the general American public, who are unlikely to be exposed to this virus at this time, the immediate health risk from COVID-19 is considered low.”

The best course of action, from what I’ve read, is what Mom used to tell us. Wash your hands. Cover up your sneezes. And go about life in a normal fashion. And I would like to add something to that: As it pertains to Coronavirus, don’t watch or listen to the news. And don’t read online news either. I don’t care if it’s Fox News or MSNBC, they are all fighting each other for the next sensational news story. That doesn’t mean we bury our heads in the sand. It is important to read up-to-date information. For reliable, non-pontificating, sources on Coronavirus feel free to click the sources below:

Stock Market Correction:
The Coronavirus has caused much more sickness in terms of stock market performance than it has to any of our health directly. There has been quite a bit of panicked selling this week, and frankly no one knows when that will end. And this week alone, the markets are down over 10%. But to put that into perspective, our bad market performance of this week has given back about half the gains we may have enjoyed in 2019. That’s no fun. But I think it’s a long way from declaring that the sky is falling, right?

Putting Coronavirus off to the side for a moment, all of us knew, at some point, that we would have a stock market correction. And remember, corrections tend to be nasty and sometimes, like this one, quite rapid. In anticipation of a correction, during review meetings, we have been diligent to make sure that the investment risk of your portfolio was something that you were comfortable with.

Two Type of Accounts:
To put it in the simplest of terms, as a client through Calder & Colegrove, you likely hold at least one of two types of accounts: a guaranteed account or a non-guaranteed account. Examples of guaranteed accounts usually equate to some type of annuity with a guaranteed provision (guarantees are backed by the claims-paying ability of the insurance company). For example, a fixed annuity with guaranteed principal or a variable annuity with a guaranteed income benefit. The guaranteed provisions in these annuities are designed for nasty stock market moments just like this.

A non-guaranteed account would be one that is subject to market risk, such as mutual funds and stocks. In that instance, we have taken great care to measure the investment risk with which you are comfortable. But with that said, if you own mutual funds or stocks – regardless if they are held with us or through your company retirement plan – you have likely experienced loss during this week.

Shouldn’t We Go to Cash in our “Non-Guaranteed Accounts?”
The question that might be on your mind right now is: Should we “go safe” and get out of the markets? I’ll take a moment to address that. When we are concerned about nasty stock markets, the label for that concern is known as “market risk.” And through the consideration of moving to cash, we are hoping to mitigate that risk. But even if that’s what we did, what most of us don’t realize, is that by getting out of the market, we are inadvertently taking additional risk, such as market timing and missed opportunity. Consider this: Imagine that you pulled out today and went to cash. And let’s say that the market continues to drop for a couple of weeks. But then, when the news is at its worst, the market rebounds over 1,000 points. And then it goes sideways for a bit, but then starts marching onward and upward. For most investors who are out of the market, they are very unlikely to get back in while things are at their worst. But to successfully time the market, that is what would need to occur.

Here’s a summary take-a-way: If you want to go safe in your non-guaranteed accounts, just realize that you may be trading one risk (market risk) for a pair of other risks (market timing and lost opportunity). By the way, that doesn’t mean you shouldn’t make a change. But if you elect to do so, I want to make sure that you understand what risks you are trading.

Positioned for the Long Run
I’m going to call a spade a spade here, y’all. I’m quite “anal retentive” as it pertains to discussing investment risk with clients. Frankly, I imagine that some might even get a little tired of me talking about investment objectives, risk scores, etc. But I do so in review meetings that we hold to prepare all of us for moments like this. We take care to make sure that the risk of your investments is aligned with your tolerance for investment risk. The exceptions are few and far between – for example, some clients are adamant in their desire to hold large stock positions in one company.

Recommendation
In 19 years in business, I have never recommended a wholesale change to a client’s portfolio strictly on the comings and goings of the stock market. The ups and downs of the stock market are simply too unpredictable. It’s like trying to make a recommendation when the ground is quaking beneath one’s feet. As a point of clarification, to me, wholesale changes denote a drastic change in the risk portfolio of a client’s investments, which contradicts their normal investment risk tolerance. On the other hand, we commonly make smaller changes to portfolios and most recently, we did so for many accounts, just back in December.

Now, there have been times that I have made recommendations for wholesale changes, but it has always been due a change that the client has endured. For example, a few years back a client we serve lost her job. And her income was quite important to her family, as you could imagine. At the time, that client had an investment objective of aggressive growth. In layman’s terms, she was a 5 out of 5 on the risk scale. But when she informed me of her lost job, and the fact that she was going to have to polish off her resume and begin the search for her next job, we moved her from 100% risk to 100% cash. I recommended that without hesitation. Because simply put, if her job search process stretched more than 6 months, she was going to need to use the funds from her IRA to support her family. It’s that aspect of her circumstance – the fact that her time horizon switched from long-term to short-term – that caused a wholesale change in my recommendation.

Your Take-a-way
The million-dollar question remains: Should we do anything to our investments? First off, please know this. I have the honor and pleasure of serving you. And this is your money. Even after reading this, if you decide that a change needs to be made, we are here for you and we will do as you request. But if you are asking me if I recommend a change to investments due to the Coronavirus-driven market swings of this week, my answer is a definitive no. It is possible that I may change my mind in the near future, but not today.

Part of what shapes my thinking is that I like to stand on a proverbial “cornerstone” when it comes to making recommendations. In fact, one of my favorite songs from church is Cornerstone. And if your spirit could use a little uplifting due to all the negative news, click here to listen. As it pertains to this week with the stock markets, the information we have to work with is more like sinking sand. And that’s not a place from which to constitute new recommendations.

DISCLOSURE
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

Economic forecasts set forth may not develop as predicted.

All data is provided as of February 28, 2020.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

Guarantees are based on the claims paying ability of the issuing insurance company.

Securities and Advisory Services offered through LPL Financial, Member FINRA/SIPC

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

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Securities and Advisory Services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.