COVID-19 has wreaked havoc on financial markets over the past few weeks. The first quarter of this year was the worst quarter for the stock market since the financial crisis and Great Recession more than a decade ago.
The S&P 500, which represents a broad cross section of U.S. stocks, fell 20% during the first quarter, its biggest drop since 2008. Meanwhile, the Dow Jones Industrial Average fell 23% during the quarter, which was its biggest decline since 1987. The Nasdaq composite index fell by 14% during the quarter.
In the midst of this massive stock market sell-off, you might be wondering what you should do now with your investments. For example, should you try to limit further losses by selling stocks? Should you keep contributing money to your retirement account? And if so, should you actually consider buying more stocks?
What’s Your Investing Time Frame?
The answers to these questions depend largely on your investing time frame. If you have a long-term investing time frame — for example, you’re investing for a retirement that is still 20 years or more away — many experts say you should “ride out” the storm and hold onto your stocks. They point to the 9/11 terrorist attacks and 2008 financial crisis as examples of times when the stock market suffered heavy losses only to eventually bounce back and set new records.
In fact, times of high market volatility often separate “investors” from “speculators.” According to The Intelligent Investor, a classic investing book written by Benjamin Graham, investors seek to buy and hold securities at suitable prices, while speculators seek to profit from market fluctuations.
The main reason many people don’t achieve their investing goals, Graham wrote, is because they focus too much on current stock market movements. Instead, investors should be patient and self-controlled when making investing decisions.
Some experts suggest that now could actually be a great opportunity to buy stocks if you have a long-term investing time frame. This might sound counterintuitive, but remember that when major stock market indices like the S&P 500 or the Dow fall, this means that the price you pay for stocks is cheaper. In other words, stocks are “on sale” compared to earlier when the indices were higher.
Do You Need Cash Soon?
On the other hand, if you have a short-term investing time frame — for example, you will need to cash out your investments sometime within the next year to meet a financial need — then it might be wise to start liquidating some of your stock positions now.
It’s generally smart to sell underperforming stocks first. These are stocks that have lagged behind their market benchmarks in recent months. If stocks underperformed when the market was rising, there’s a good chance they will underperform when the market rebounds as well. In other words, long-term losers tend to keep losing and long-term winners tend to keep winning.
No One-Size-Fits-All Approach
Everyone’s financial situation is different, so there’s no single correct answer to the question of what you should do if your investments lost value due to the coronavirus. Consider your investing time frame and your level of risk tolerance — or how well you can handle market volatility and turbulence from an emotional standpoint — to make the best decision for you. Talk to your financial advisor to come up with a solution that is right for you.
Disclaimer: The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.