The Stock Market 20% Down – What Next?

No one can predict the future, especially in a time of global crisis. In my investment lifetime, there have been five or six such events. All proved to be buying opportunities for stock. History is on the side of long-term investors.

Global crises are, fortunately, few and far between. Twelve years ago, the near collapse of the worldwide banking system was indeed a crisis of global proportion that had a massive negative impact on both the financial and the real economy.

The U.S. Government – through a $700 billion bailout program (TARP) – came to the rescue of the world’s financial system. At the time the issue was controversial, and it took Hank Paulson, then the Secretary of the Treasury, on his knees, beseeching Nancy Pelosi to get the House of Representatives to support the bailout. It passed, but only after a first failed attempt. Had TARP not been passed, the Great Recession would have become the Second Great Depression.

Today we are in the midst of another worldwide crisis – COVID-19. Unlike the financial crisis in 2008 which had been brewing for a couple of years, this one has come upon us in just a matter of weeks and has only now been accepted as internationally widespread in nature. The medical and social implications associated with the COVID-19 are monumental and indeterminable at this time. The economic fallout is equally as indeterminable.

Financial markets are leading indicators – they look into the future and when they see uncertainty, they react negatively. The stock market is also a discounting mechanism – the less visibility it has into the future, the less it is willing to pay for stocks, and we are still a long way from knowing how severe the economic ramifications will be around the world from this virus. The lack of a clear and executable plan for dealing with testing in this country is only adding fuel to the fire of uncertainty. Clarity from our government would go a long way toward reducing anxiety, which in turn could help calm markets.

For the last ten years, except for intermittent corrections, the U.S. stock market has been on a bull run. Bull markets tend to exaggerate on the upside when optimism is rampant and to do the same on the downside when optimism turns into pessimism. The see-saw activity of the last few weeks is playing out as one might expect. So, you may logically ask, “What am I to do? Sell, Buy, Do nothing?”

There is no right answer, and everyone has their own needs and objectives, so in the short run it is hard to provide advice, and certainly not advice that is universally applicable.

That being said, there is one group of investors, namely, SAVERS WHO STILL HAVE AT LEAST 10 TO 15 YEARS BEFORE RETIREMENT - ESPECIALLY MILLENNIELS!! and for them I do have advice. Having the benefit of not needing the money for years is the key point here.

First and foremost, if you are contributing to your 401(k) plan, do NOT stop and do NOT shift your holdings into cash. This kind of a correction is an opportunity to put as much as you can into your long-term savings account, particularly if your employer matches part of your contribution.

If you are looking to take advantage of the sharp correction in the markets with other than your 401(k) money, don’t put all your investable assets into the stock market at once. No one knows when the selling will exhaust itself and you don’t want to drain your own buying power too early.

Think of market bottoms as a saucer of sorts. If you follow a disciplined investing program, using patience and buying on the dips, you will likely be adding to your holdings on the righthand side of the saucer as equities begin their next upward move.

Market corrections such as this one offer long term investors the opportunity to “average down,” a smart way to lower the cost of your holdings and create greater gains in the long run. As the great mystic Saint Teresa of Avila said, more than 400 years ago, “This, too, shall pass.”