Marc Cuniberti: Hold for the long-term coronavirus crashes
With the coronavirus now infecting over 400,000 people and likely 500,000 by the time you read this and with most of the globe’s inhabitants immobilized by fear or government decree, we must conclude that we are facing one of the most serious threats to mankind in the modern era. Although nothing is for sure where pandemics are concerned, it could be argued based on the mortality statistics however that the coronavirus is really not a threat to mankind’s very existence.
What effect it has to world economies is an entirely different matter. The virus could do immense damage to the various economies of the world. That said, the fear the coronavirus instills and the economic damage it will cause will no doubt be felt for months — if not years — to come.
It is a foregone conclusion a worldwide recession awaits. An ominous claim to be sure, but one could hardly draw any other conclusion based on what we are witnessing in the face of this calamity.
As for the markets, if you followed me for any length of time, you know I have written on numerous occasions about having a sell point for one’s portfolios. Going against the common catcall of much of the financial industry that believes holding for the long term is prudent advice, instead I believe there is a critical flaw in the “hold for the long term” method of investing.
Einstein was rumored to have said that the ramifications of the existence of hell and God were so dire one had better accept both just to be on the safe side. The same could be said for having an exit strategy. The ramifications of not having one when a catastrophic sell off occurs like the one we are witnessing are too dire to ignore.
Sure, for the majority of market corrections, one only has to wait it out for previous gains to rematerialize once the markets do their usual dance of recovery. But when we hit one of these “once in a lifetime” correctional phases, losing half one’s investment enjoys little soothing from those five little words “hold for the long term.”
Indeed, I am of the opinion to call oneself an advisor, you have to accept the reality of investing, which is to say that in all investments “there is a time to hold an asset and a time not to.”
And the last month could be said to be one of those time not to own stocks. To advise holding forever and a day seems a bit like a doctor telling you to get better but doing nothing to facilitate your path to recovery.
Is an advisors paycheck worth such inaction?
And although most of the time holding stocks through thick and thin may seem like a good idea, I doubt there are many investors that are currently comfortable they “held” for the long term.
Indeed, many of us don’t know, especially in light of current events, “how much long is left in our term.” Others may be kicking themselves in the head for believing such claptrap as is the “just ride it out” crowd.
With the Dow down 35% at the time of this writing, and maybe going lower, had an investor set a pre-sell point, be it a certain percentage of portfolio value or an particular index value, all that resulting dry powder now in the account would buy 35% more stock.
Now that’s a difference that could, well, really make a difference.
While the buy and hold crowd is now just hoping the markets recover so they can get back to even, those with dry powder to spend might reap some big rewards if the market bounces back to previous levels. Yeah, buy and hold seemed like a good idea at the time.
Much like playing a slot machine where people practice sound money management by putting a limit on how much they will lose before walking away, it seems a no brainer to have the same ideology when gambling with one’s entire life savings.
In my experience, however, few advisors nor investors ever leave the poker table of their stock markets to live and fight another day. Much like an out of control gambler, they go from “I’m not down far enough” to “I’m down too far to get out now” and just ride it to wherever it might end up.
Not a pleasant thought should the Dow be on the road to another 5000 points lower.
I would ask, thinking back in hindsight, would you have wished you had a sell point as the market fell hard the last few weeks? And are you glad you’re holding for the long term?
As for the virus, apparently I heard a rumor that Spain and Brazil are just going to sit back and let the coronavirus rumble through the country, sickening who it will.
The thought is, and not such a far-fetched one, that the economic damage caused by a widespread shut down of the economy will be far worse in the long run then what the damage the virus would ever do.
An interesting thought to be sure.
Both in the human and economic toll, the damage will be horrific, and no doubt could not probably have been avoided.
As for investor portfolios, something as simple as predetermined sell point could possibly have saved much of the damage investors are likely seeing today. And I would ask, how hard would that have been and how much now do you wish you had done it?
Marc Cuniberti is an Investment Advisor Representative through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Marc can be contacted at SMC Wealth Management, 164 Maple St #1, Auburn,530-559-1214. SMC and Cambridge are not affiliated. His website is http://www.moneymanagementradio.com. California Insurance License # OL34249.
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