I just heard from another client asking how to stop their contributions to their employer plan because of the recent Coronavirus (also known as COVID-19) market decline. It is times like these that I see how important my job is to the world. My message remains the same- this is an opportunity. The hard part is that we have to operate in a MIND over MATTER mindset, which is scary and hard!
This market has been hard for all of us to endure, especially when we are putting money into it via our employer sponsored retirement plan (or our kid’s 529 college plan, or whatever reoccurring contributions you are making) only to find shortly afterward that your contribution is “gone” due to market drops. But, I can’t stress this enough, if your budget can afford you to continue your contributions as-is I encourage you to maintain as you were. Why? Because you are buying more shares (shares that are effectively on sale) than you normally would when the market was at the high it was just a few short weeks ago.
Let’s look at this from a numbers perspective. Many of the money managers have been great at sharing their market research so I will share some of their insights here.
Jackson National, an insurance company that is one of the top annuity providers in the US, has ran the numbers for us. Let’s look at the stock market since 1925. Take a guess at how many years the market has ended with an annual return of -20% or worse? Keep that number in your head. Now, guess how many years the market has been up 20% or more? One of these scenarios has occurred only 6 years and the other has occurred as much as 34 years. So which was which?
HOW MANY YEARS HAS THE MARKET BEEN DOWN 20% or WORSE? 6 years1
HOW MANY YEARS HAS THE MARKET BEEN UP 20% or MORE? 34 years1
Did that surprise you?
Even so, it might not influence you enough to keep buying in the market, but maybe this will.
Yes, Coronavirus is different than past viral outbreaks, but then again, it’s very similar. American Funds, one of the largest investment companies in the US, has shown global market reactions (using the MSCI All Cap World Index) to SARS, Avian flu, Swine flu, Ebola, Zika, and now Coronavirus (as of 3/9/2020). Most of these points include a deep dive in the market only to show a relatively steep rebound afterward.2
Here’s another chart that might reassure you on remaining invested in the market. Let’s look at simply investing in the S&P 500 using a general index. For ease let’s just the Vanguard S&P500 ETF (Ticker: VOO). If you were buying this with your $200 monthly paycheck contribution, your purchases would have looked like the following*
2019 Closing share price
# Shares bought with $200
2020 Closing share price
# Shares bought with $200
February 15 / 14
March 15 / 13
A few things can be seen in this chart. First, the lower the share price the more “bang you get for your buck”, so to speak. In March 2020 your $200 contribution bought 80% of a share of the ETF, compare that to the prior year March when your $200 contribution only bought you 77% of a share. Second, the drop in price might not be as drastic as you might have perceived. The losses seen on this investment, similar to many other investments, have virtually removed the gains made in 2019, which is sad because 2019 was a great performing year in general. But in the long-run, it’s just a quick moment in time lost. It won’t make much difference in 10 years, or five years for that matter. But what will make a difference is your purchase of shares on discount (like the 4.6% discount from March 2019 to March 2020 for Vanguard’s S&P 500 ETF).
What I hope you get from all of this is to see things from a different perspective. As long as you were invested appropriately in the beginning according to your time horizon, this shouldn’t be a time to be scared. Instead, this is a great time to be excited for all the bargain hunting your money managers are doing. As Baron Rothschild so eloquently said, “the time to buy is when there’s blood in the streets, even if the blood is your own”. Now let’s channel that MIND over MATTER mindset and commit to our long-term financial wellbeing.
*Not including any trade or management fees. Share price details obtained from www.Finance.Yahoo.com.
1 Jackson National. The Market’s Been a Bumpy Ride- But It’s Gone Up More Often Than Down. July 2019.
2 American Funds. 4 Ways to Stay Calm When Markets Stumble. March 2020.
Using dollar cost averaging does not assure a profit and does not protect against loss in a declining market. Also, using this investment method involves continuous investment in securities regardless of fluctuating price levels of securities. Therefore, an investor should consider his/her financial ability to continue purchasing through periods of low price levels.