It’s probably safe to say that we’ve entered uncharted territory. As the COVID-19 outbreak lingers with no immediate solution, and a cloud of uncertainty continues to blanket the economy, we are witness to a generational event like no other. Even though we are not yet on the other side of this crisis, it has become clear that the world is going to look different when we get there.
But, what exactly is the impact of COVID-19 on investors? For many, their fear of contracting COVID-19 is only outweighed by their fear of losing a chunk of their wealth as the market reacts to the crisis. While there’s plenty we all can do to mitigate the risks of contracting the virus, many investors may feel helpless when it comes to their investment portfolio, especially those relying on their portfolio to generate their retirement income.
The Impact of the COVID-19 Crisis Depends on Your Life Stage
Unquestionably, this crisis, like many of the generational crises of the past, impacts investors. However, just as the market is made of stocks that don’t always move in sync with one another, investors are not a monolithic group that reacts or should react in sync with one another. Investors who are ten or more years out from retirement aren’t nearly as impacted as investors who are a few short years from retirement, and those at or in retirement may be affected the most. How this particular crisis might impact any investor depends in large part on the stage of life he or she is in or approaching.
So, let’s tackle that question separately for each of the different life stages and consider how each group should react to this crisis. The first group we’ll call the accumulators because, if they are ten or more years out from retirement, they’re still accumulating capital. The second group, who might be on the glide path to retirement – still ten years or less out, but with the runway in sight – we’ll call pre-retirees. In the third group are those who have transitioned from accumulating assets to distributing them, so, for lack of a better term, we’ll call them retirees.
That’s a lot of ground to cover in this space, so we’ll tackle them one at a time in three different posts, starting with accumulators in this post and following up with pre-retirees and retirees in subsequent posts.
Accumulators Need to Get Philosophical
For accumulators who might be looking at this economy and the stock market with dread, it’s a good time to get philosophical. The fact is, it’s an exciting time to be an accumulator, especially as it relates to stock investing, but only if you abide by a fundamental principle of investing – Have faith in the future.
Faith in the future is the most important guiding principle for long-term investment success because it is grounded in the belief, supported by the evidence of history, that optimism is the only valid perspective one can take as they view the future. Long before there was a stock market, technological advancement and innovation propelled our economy’s expansion, and its pace continues to accelerate, bending the curve of progress further upward.
Technological innovation probably won’t be able to solve all of the world’s problems, but time and again, it has proven that most of the things that will benefit humanity have yet to be imagined. And, with that, productivity increases, companies flourish, earnings grow, and stock prices rise.
The stock market has increased in value more than 1000-fold since World War II. This, despite multiple recessions, increasing global strife, massive debt and deficits, and a financial meltdown that nearly crippled the world’s banking system. Throughout that period, there have been as many bear markets as bull markets, but bear markets’ duration has been far shorter. On average, the percentage of market declines has been just a fraction of the market gains during bull markets.
In other words, the bull market advances have been permanent, while bear market downturns have simply been brief pauses on a long journey toward a continuous expansion of wealth. Successful investors view the future optimistically because to do otherwise would ignore the historical record. It is, therefore, a realistic view.
A Practical Reaction to Market Downturns
Practically speaking, any down market is a terrific opportunity for accumulators. Investors should be cheering down markets because they are all opportunities to accumulate more shares of your stocks or funds at lower prices. That lowers your cost basis in the shares you own, positioning you for a larger profit if and when the market recovers. Your real risk is not being in the next market downturn. It’s being out of the market when it climbs to new highs.
With a long-term strategy, it makes no sense to be concerned over short-term market fluctuations that, while seemingly consequential at the moment, will have zero impact on the long-term performance of their investments. Even significant market crashes of 40% will appear as a minor blip on your investment performance over 20 years.
Thoughtful, disciplined, and patient investors understand that, once the danger passes, prices will resume their climb to new highs, and the great companies will lead the way.
