You’ve heard about it, and I’ve heard about it. There’s no getting around the global phenomenon and panic surrounding COVID-19, or informally, the Coronavirus. But, amidst the panic of buying pallets of toilet paper and hand sanitizer, I would encourage you to listen to some reason and responsibly prepare.
Early this morning, the stock market triggered a circuit-breaker to halt trading for 15 minutes. This is the latest in several drops and triggers as you no doubt have heard about. If you have yet to check your investment account values, I would be very surprised.
But, take a moment to think about the past. As we know, past performance isn’t indicative of future performance. However, it’s a good reference point because it gives us perspective. Because of this, I would encourage you to not let the effects of COVID-19 to alter your course. Here’s what I mean:
If you look at the performance of the S&P 500 (which triggered the circuit breaker), you’ll see over the past 6 months, it’s dropped. At the beginning of the period, it started at 2,997.96 and as of the screenshot, it was trading at 2.455.49. That’s an 18.43% drop in 6 months, which sounds terrible!
Now, I want to show you another chart. The chart below is 1 year prior for the S&P 500. It reflects a starting point of 2,832.94 and as of the screenshot, trading at 2,444.65. This reflects a drop of 13.71%. Bad of course, but not as bad as the past few weeks.
I have one more chart to show you, this time a 5-year chart. First, notice that it’s green! That’s because it’s grown over the past 5 years, from 2,108.10 to 2,451.95 (again, at the time of this screenshot). That’s an increase of 15.31%. While we may have wiped out the past 5 years of growth, if you look further back within the history of this fund, it’s only ever gone up.
Here’s a final screenshot of the ALL-TIME value and growth of the S&P 500, showing that’s while there have been a few blips on the radar, the value trends upwards. Again, past performance doesn’t account for future growth or loss but it helps put this into perspective.
So, what does this mean?
Let’s start with the basics. When you invest in a brokerage account, 401(K), or another type of investment, you are exchanging “cash” usually for a stock, bond, mutual fund, etc. Now, when you log into your accounts, you’ll notice the value has significantly dropped. However, what hasn’t changed is the number of shares/stocks/etc. that you own.
This is the key point in all of this mess. You still own those stocks/bonds/mutual funds. If you bought 500 shares of Disney or Apple, you still own them UNTIL you jump ship and sell.
It’s at the time you sell your holdings that you REALIZE those losses.
If you don’t sell your holdings, your “account value” will go down in your brokerage account software but you haven’t lost anything!
So, what do I do?
The panic that the COVID-19 virus has caused is real, don’t get me wrong. But, let me share with you some industry knowledge. Put the fear/doubt/trouble of COVID-19 out of your mind for just a moment. Stop thinking about the value of your investment accounts too.
Because the market has dropped so much, if you have an automatic investment plan set up (which you should!), then you’re buying those same stocks/bonds/mutual funds at a discounted price.
If, because of the market turmoil, the price of that stock has dropped to $5 a stock and you still invest $100, you’re now buying 50 instead of 10 per month. What this does is push your cost basis down, which means your overall investment value per stock/share goes down. But, if/when the market rises, you have MORE holdings than you would have it if kept going at the rate it was before the drop.
Basically, you’re getting a discount right now, if you choose to NOT sell and continue to invest as you were normally doing.
I would highly encourage you to stay the course amidst the panic and confusion that COVID-19 has caused. Consider the mindset shift to the investments at a discounted rate instead of your account values dropping. There’s no guarantee that past performance will pave the way for more gains but don’t lose hope!
DISCLAIMER: Of course, we can’t possibly cover every scenario that someone may encounter because of COVID-19, and there may be an occasion where selling your holdings makes sense. Our choice would be to continue to invest if possible because of the discounted rate. We’re not your financial advisor, but only sharing what we plan to do given the circumstances. If you have concerns about the market turmoil, you should definitely speak to a financial advisor!
What if I’m Ready to Retire or Already There?
This is one of those really tricky situations. If you’re on the verge of retirement or already there, you are definitely keeping an eye on the markets because your very livelihood is on the line. The only real and valuable advice I can give you is to meet with a financial advisor to best plan out your retirement date and review your budget.
Because of the sharp decline of the market (and likely your investments), your retirement has likely changed. As such, I would highly encourage you to meet and discuss options with an advisor, and not take this on by yourself. The last thing you want to do is make the situation worse!
Here at Pocket Change Lifestyle, we like to share our knowledge with you, and that includes deals and software that make our life easier. Here are a few of those things:
Personal Capital is a great piece of software to track net worth! We use it all the time during our budget meetings. I was recently approved to be an affiliate, so if you sign up as a new customer through my link I’ll get a kickback! Here’s an example of the dashboard that shows a summary of our various accounts, and our net worth. It’s simple to use and secure!
Earning extra cash – Looking for some ways to make some extra cash on the side? Here are a few ideas from some of our previous posts!