I want to share an anecdote with you today that may seem a bit sarcastic at first.
Please don’t let me be misunderstood. I’m in no way making light of the coronavirus correction that has slammed the stock market.
It’s just that this story speaks volumes about the need for investors to take these things in stride and focus on the long haul.
It has to do with the day the stock market crashed back in October 1987.
Known as “Black Monday,” October 19th saw the bellwether Dow lose 22.6% of its value in a single day.
At the time, I was a banking-technology analyst working in San Francisco’s financial district. My boss called me from New York after the market closed to talk about the impact of the Dow’s plunge.
“This is huge,” he told me. “It’s Kaboom…”
I said to him, “Hey, this is great news. They’re having a sale on Wall Street.”
Yes I know the current panic is bound to slow the economy as we see travel restricted, events canceled and businesses temporarily closing.
But as I look out over the horizon, I see reasons to be optimistic.
Lessons from Investing History
Now then, as a boomer of a “certain age,” I have lived through all sorts of events that have either roiled the economy or the market, or both.
We’re talking about the Vietnam War, two Arab oil embargoes, and three Gulf Wars. I also had to manage my way through several recessions and witnessed big political upheavals like two presidential impeachments in the last 21 years.
Not only that, but I had to work my way through the “dot com” bust of 2000-2002 and the Great Recession of 2008.
So, I can tell you from firsthand experience that events like those unfolding before our eyes always look much worse when you are caught in the middle of it all.
That’s especially true when you have the media providing saturation, 24/7 wall-to-wall coverage. As individuals and investors, this kind of constant media attention can leave you reeling, with that stomach-churning sense that things are spinning out of control.
At times like these, it’s only natural to worry about the impact the market’s bruising selloff will have on your net worth and your retirement accounts.
But I have seen that after each of these shocks, both the economy and the stock market have rebounded.
Let’s take a look at a couple of them to see why it’s so important not to panic and to keep focused on the long-term objective of building wealth.
The crash of 1987 is a good example of just what I’m talking about. As I noted earlier, Black Monday, the crash on October 19, clipped more than 22% off the Dow’s value in a matter of hours.
After that debacle, the federal government instituted reforms to prevent this type of panic. Most notable is what we saw yesterday for the third time in six sessions.
I’m talking about the circuit breaker that halts all trading for 15 minutes if the S&P 500 drops more than 7%. The idea is to give investors a moment to catch their breaths and halt the onslaught of sell orders.
Had this been in place back then, Black Monday couldn’t have played out the way it did, neither in its severity nor in its speed.
Causes for Optimism
Here’s the thing. The long-term bias of the U.S. stock market is up. Once the panic is over and investors feel confident again, they get back into the market.
And that can happen fairly quickly. It took just 15 months after black Monday for the stock market to get back to even.
After that, stocks resumed their upward march on the strength of the U.S. economy, which has proven time and again that it is incredibly resilient.
We saw something similar happen in the 2008 financial crisis. On September 29 of that year, the Dow lost nearly 778 points in one session.
I vividly recall that panicked investors began unloading stocks en masse. Driven by fear, many took extreme losses simply to get out.
But remember, both those events were caused by fundamental issues in the economy.
In the late 1980s, it was the impact of the leveraged buyouts that swept the nation and weakened corporate and bank balance sheets across the board.
And the crash of 2008 occurred on the back of subprime lending practices. Back then, it was almost like if someone could fog a mirror they could buy a home they couldn’t afford with no money down.
Yet not even the subprime insanity of 2008 could keep investors down. A good friend and colleague of mine, Andrew Keene, actually managed to lay the foundation of his personal fortune during that troubled time.
He’s using the same techniques to show others how to make the most of this new crisis. You can just click here to see what he has to say.
But even beyond top-flight experts like him, even the broader market rebounded roughly six months later on March 9.
In the process, it has hit new highs many times since then. And while you could argue the market was overbought, let’s be clear that; what is happening right now is not based on a weakening economy or financial system.
Waiting out the Storm
The current selloff stems mostly from the fact that government officials all over the world are shutting down or restricting travel and other events due to the impact of the coronavirus.
Here in the U.S., health officials and the media are warning that the worst is still to come. It didn’t help matters that the Fed just lowered interest rates to zero. In fact, that only spooked Wall Street even more.
That reaction obscures the fact that until quite recently, the underlying economy has remained very strong, with the best jobs climate we’ve seen in 50 years.
With that in mind, here are 10 things to think about right now:
- Remain calm and keep the coronavirus and economic news in their correct contexts.
- Avoid panic selling, especially if you will take steep losses.
- But make sure you have your protective stops in place to lessen the impact on your portfolio.
- If the market triggers your stops, take it in stride and move on. This is no time to second guess yourself.
- Remember that your retirement accounts are for the long haul and you benefit by adding to your positions while the market is off. This is the ideal time for dollar-cost averaging.
- Put together a list of stocks you would like to acquire when events are more in your favor.
- If they are great tech stocks that you want to start buying soon, enter with small amounts and build positions gradually.
- On the other hand, don’t get greedy right now and pounce on stocks just because they suddenly seem “cheap.”
- If you harvest profits from a taxable account, be sure to reserve for them. You don’t want to end up being upside down with the IRS next year.
- Pay down whatever debts you can. This is a good time to be as liquid as you can.
Let me close with a tool that is not financial. This one is philosophical in nature.
I awoke at 5:30 AM yesterday knowing full well it would be a very tough day for investors.
So, I lay there, put my arms toward the heavens and literally counted my blessings – two wonderful kids, a great marriage to a loving wife, my health, a nice home in a beautiful location, and the fact that both of my parents are still alive.
And the joys of being a tech investor, because no matter what bumps the economy or market throw in our path, this sector is going to remain the road to wealth.
Cheers and good investing,
Michael A. Robinson