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The Stock Market’s (co)V(id) Recovery

Author: Adam Keller

“This time will be different.” - Anonymous

If you only looked at your investment balances on January 1st of this year and today (June 8th), surely you wouldn’t panic. After all, you’re probably up from the last time you checked. Of course, during that time period, specifically the end of February until June 8, a few things happened.

The United States, and the world, dealt with the coronavirus pandemic by enforcing mandatory shutdowns of businesses and Stay at Home Orders for citizens that upended everyday life as we knew it. The S&P 500 index (“S&P”) reached an all-time high on February 19 and dropped 34% from that point by March 23, which represented the fastest 30% drop in history.

Since that March 23 low? The S&P rebounded with the best 50 day performance in history, rising 37.7% in that time, and is now only 4.5% away from the Feb 19 all-time high. The Nasdaq index of technology companies closed at an all-time high on Monday, June 8. Looking at a table of the largest daily gains and losses in the SP500, by point changes, you’ll notice that 14 of the 20 largest gaining days, ever, occurred in the past 100 days. The same is true of 12 of the worst 20 loss days, ever. Simply put, the recent short-term performance of the United States stock market was historic. However, when looked at with a different perspective, perhaps we should not be surprised at all by the performance we witnessed so recently.

The economy, and the stock market, are unpredictable. Peter Lynch is famous among investors for managing the Magellan Fund for 13 years and delivering a 29.2% annualized return over that time. $1 invested in Lynch’s fund in the beginning grew to $28 by the end of thirteen years. Not bad. While Lynch’s record as a money manager is undeniable (his performance has never been matched), I find his musings on the stock market to be especially helpful during unprecedented times like these.

Peter Lynch - The Market Goes Down (VIDEO)

As Lynch said in 1994, history had shown at the time that once every two years the market falls 10% (a correction). And once every 6 years, the market falls 25% (a bear market). Most importantly, “If you’re not ready for that - you shouldn’t own stocks.” Since Lynch made those comments, 26 years have passed. In those 26 years, including earlier this year, we have now had four bear markets. On average, one every 6.5 years. Not bad.

The emotionally healthy investor did not panic and offload stocks as the market was taking a nosedive in March. Perhaps said investor did nothing, often the hardest thing to do in times of unprecedented uncertainty. Perhaps said investor re-balanced their portfolio by selling bonds as they became a larger percentage of the overall portfolio and used those proceeds to buy stocks as they became a smaller percentage of the overall portfolio. The point is to not panic. When you are prepared for something that is going to happen eventually (ie bear market), you won’t panic when it does in fact happen. Pandemic or otherwise. This time was not different.

Peter Lynch - No One Can Predict the Stock Market

“If anybody can predict interest rates right three times in a row, they’d be a billionaire. Certainly, there’s not that many billionaires on the planet.” - Peter Lynch

The above quote is my favorite argument against trying to time the market. If you had the foresight to consistently time the market, the amount of money you could make with such predictions is theoretically infinite. But you can’t time the market. Not consistently. Almost no one can. That’s the point.

What can you do now?

The same things you can always do. Have a comprehensive financial plan, based on your current situation, expected near term future situation, and long term future goals. Below are some suggestions to consider:

  • Download Personal Capital and gain a better understanding of your current personal financial health. The free app and web service allows you to keep track all of your assets and liabilities in one place, including helpful analysis of asset allocation, investment fees, and retirement planning – among other awesome features.
  • Take advantage of tax advantaged retirement accounts to the fullest extent possible (401k, HSA, IRA, etc). From here, the real fun begins.
  • Ensure you have the necessary elements of a proper Estate Plan, based on your specific needs. Similarly, if you own or partially own a small business, consider whether you have a viable Succession Plan in place for inevitable changes.
  • If the stock market scares you (it shouldn’t), lock in a guaranteed after-tax rate of return by paying off debt at an increased rate (mortgage / student loan / business etc).
  • Consider refinancing your mortgage. The average 30 year mortgage refinance rate is currently 3.61%. Do you know your mortgage rate?
  • Continue to invest long term capital regularly, in a way that fits with your risk tolerance and time horizon. Time in the market means compounded returns and dividends. As a millennial investor with a long time horizon, I would argue 100% equities is the only proper asset allocation for those close in age. Millennial or otherwise, if you found yourself upset with the amount your portfolio “lost” as of March 23 and were ready to sell if things “go lower”, this is a good indicator that you underestimated your risk tolerance. If you have any high interest debt (5%+) you are probably better served.
  • Never invest any capital into the stock market that you may need or otherwise arbitrarily choose to withdraw within five years (some would advise ten years). As the past three months have taught us, a large drawdown in the stock market is always possible. If you cannot stomach the initial hit and the inevitable recovery that may take years, put your money to work somewhere else. Just be aware that it probably won’t work as hard for you.

The most important thing, if you haven’t already, is to take control of your financial health and well-being. I can’t tell you what to do with your money but I know that you need a plan. Myself and my colleagues at Kearney, McWilliams, and Davis are always here to help. Stay safe out there and keep grinding, because, as Tony Soprano once said, “The hustle never stops.” Unless of course you’re Peter Lynch. He retired on top at 46 with a pile of money, an investing record that may never fall, and a happy family. I hear he golfs a lot. Not bad.