I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful. - Warren Buffett
A little over ten years ago I sat in a meeting during the middle of the financial crisis we call “The Great Recession”. The speaker was a well known leader in the community and had the ear and trust of those in attendance. At this meeting this man spoke about the severe decline of financial markets and told us that he had sold everything in his company’s retirement plan and suggested that was a prudent thing to do. He was not a financial advisor and to my knowledge had no more experience with personal finances than anyone else in attendance. Fortunately, I did not follow his counsel in an area which was not his expertise.
Markets bottomed in March of 2009 after a broad decline of over 50% from their peak less than a year earlier. We sometimes forget that when markets were already down 50% fear was reaching a crescendo which made it appear that a dive over the cliff with the remaining assets of those portfolios seemed imminent. Those darkest days I remember well - as I struggled daily to convince people to stay the course despite the gut-wrenching decline. There was legitimate concern in both individual AND institutional investors that the world’s financial systems were broken. For those who were close to retirement or who had recently retired – the situation seemed to be their worse financial nightmare.
What happened after that March 2009 bottom? In 2009 the market returns were in the high 20’s to mid 30’s depending on how your portfolio was allocated. If you missed that because 2008 and early 2009 scared you into selling - you watched on the sidelines with the knowledge that by selling you had locked in those scary prices and missed the subsequent recovery. I have met many of these people over the last ten plus years and for many of them their financial lives and plans for their future have never recovered. Their understandable fear led them to behavior (selling) that they have greatly regretted ever since.
With that as a backdrop, I write this column with markets down 25%+% from their peak levels a little less than a month ago. Declines have been driven by fears and uncertainty on Covid-19 and a simultaneous oil production fight between Saudi Arabia and Russia. The fear, uncertainty and questions I am hearing now are reminiscent of those from late 2008 and 2009.
What to do? Decisions on investing which hopefully included discussions of risk tolerance and asset allocations are generally decided dispassionately. Any decisions made in the middle of a crisis are by definition driven by fear and frustration and are therefore not likely to be driven by data. While the fear of Covid-19 is largely justified from a health perspective (especially for senior citizens and those with pre-existing health conditions), the economic impact will likely be far less than the market reaction would seem to indicate.
My suggestions to those of you who are fearing for your financial future:
1. Work with an advisor who is calm during the storm. Experience in similar markets will be valuable to you.
2. Trust the decisions you made dispassionately with data. They are generally better than those based on emotions. Stay the course. If you do not need to use the bulk of the invested money in the next couple years there is no reason to sell. If fact, this may be a great opportunity if you have dry powder and the nerve to put it to work while markets are paralyzed by fear.
3. Don’t treat financial markets as a casino. If you are “playing” with individual stocks you are likely to be burned when something negative happens to their price and you lose your nerve.
4. Look forward to better returns in the months and years ahead.