The coronavirus has made its way to the western world, sparking fears of a global pandemic.
Of concern is a new case in California where the patient had not come from a country known to have the virus, which means the patient must have contacted an infected person within the United States, implying there could be many more infected people at large.
As I am writing this column, I see that a second coronavirus case of unknown origin is confirmed in California, indicating the virus is spreading in the state, according to the Washington Post. News of the spreading virus triggered a massive selloff in the markets.
The S&P 500 fell 10% in just six days, according to Yahoo Finance. The markets are clearly in correction territory. This could be just the beginning.
What a difference a week makes. With new infections occurring at a higher rate outside of China than inside the country, investors are understandably concerned that the coronavirus will severely cut global gross domestic product.
Chinese suppliers are running low on inventory and can’t get workers back to the factory. Italy canceled the famous Venice Festival and is warning against people congregating in public places. It might be good for Netflix and food delivery companies, but this one looks like it’s going to hurt.
Starting last month, this adviser has been stating in client meetings and across the country in TV and radio news interviews that 2020 feels eerily similar to 2000. Like then, everything everywhere was hitting new highs in January.
But starting in February 2000, the NASDAQ, thanks to the tech wreck, lost 80% of its value after quadrupling from , according to Yahoo Finance. With $100,000 in tech stocks, mid-decade investors finished 1999 with about $400,000. Starting in February 2000, the correction took tech stocks down by 80%, leaving those investors with about $80,000, according to Yahoo Finance. What a ride.
Last year, investors worried about the effects of President Donald Trump’s Trade War. This year the coronavirus has erupted, causing investors to worry about how bad things can get.
There’s a notorious saying on Wall Street that the stock market takes the stairs up and the elevator down.
I am fond of saying that it’s not about the prescription, it’s all about the preparation. No one saw the bus called coronavirus coming for us. And no one needed to see that one either.
For some time I have agreed with David Stockman, former Office of Management and budget director under President Ronald Reagan, that underneath the surface, there is a financial malignancy that is devouring the very foundations of capitalist prosperity in America.
To be perfectly honest, the securities industry is about two things: hoarding assets and collecting fees.
Buy and hold works just fine when you don’t need the money. Buy the dip can work too when you have fresh cash to add to your portfolio. But savvy investors hate losses more than they love gains.
This is especially true when investors need to take money out to live or must take rising income every year for the rest of their lives to satisfy IRS required minimum distributions from traditional retirement accounts.
Savvy investors do the math. If you were 70 ½ in January 2008 with $1 million in your IRA invested in stocks, you might have fully participated in the serious 60% drawdown by March 2009. After the 57% market loss and a modest 3% (to keep the math easy) withdrawal, what was $1 million in January 2008 became $400,000 in no time at all.
Now you need a 160% gain just to get back to even. Clearly, the odds of getting back to your high watermark are not in your favor. And you know you must increase your withdrawal rate for the rest of your life. You must sell part of what you have. Every year. Forever.
Instead of insulting investors with an approach that feels like a “Sit and take it” we employ technology and take the time to help you:
• Discover, perhaps for the first time, how much loss can you accept.
• Design the portfolio and give it the attention the job deserves to see if the account may perform within your personalized loss parameters.
• Apply active management strategies to portfolios to help limit loss. Instead of holding shares and watching the price go down like the Titanic, your money is looked at daily with this question. Should coal be put on this fire to enjoy the melt-up, or is water better at this time to limit the melt-down?
• And add more investment legs to your portfolio stool. We will offer different vehicles that have little or no correlation to the stock market. Sometimes boring trumps excitement.
No central monetary planner is omnipotent. We continue to be nimble and fact-driven. We understand there’s a time to make money and a time to keep the money. If you have any questions about your holdings, please give us a call.
John L. Grace is president of Investor’s Advantage Corp, a Los Angeles-area financial planning firm that has been helping investors manage wealth and prepare for a more prosperous future since 1979. His On the Money column runs monthly in The Wave.
