Think, not panic about market corrections - March 04, 2020

Think, not panic about market corrections

We often underline the importance of long-term thinking and discipline in investing, and these aren’t just things we love to say. These are universal values when investing. After the outbreak of the new coronavirus, many experts started to see the importance of talking about these virtues too. We gathered some of their opinions.

Like it or not, market fluctuations and corrections are a natural part of life. When unforeseen things happen, volatility rises. In the case of COVID-19, a new virus appeared out of nothing and lots of factories closed. Market and production expectations fell. This obviously affected the markets too. But true professionals don’t panic too much about it: they think through possible scenarios and act accordingly. Here are some expert ideas about what to know and do in a situation like this.

Corrections do happen often wrote a very clever Q&A article about this phenomenon dubbed “Market corrections are scary but also, in some cases, necessary”. As they write, a “correction can be a healthy event, eliminating excesses that have built up after extended runs of market optimism”.

They also underline that these corrections happen rather often, every couple of years on average. “This is the 24th time in the last 50 years that the S&P 500 has fallen at least 10%, including both bear markets and milder corrections”, they mention. Smaller corrections also happened during the 11-year-long bull run we have seen up until now. We only need to recall the small, but sudden fall of the markets at the end of 2018 (after which came one of the strongest years of the market).

What comes next? Depends on many things!

According to our own analysts, a lot will depend on how fast coronavirus goes away. If the big panic is over in some weeks, things can get better fast. If the problem persists longer, markets may stay low longer too. MSN gathered that market corrections that didn’t turn into bear markets took 135 days on average to hit bottom, then only 116 days to correct themselves and “recoup all … losses”.

Bear markets (markets with a continuous 20% loss) have more dire effects. Federal Reserve already cut rate by .50 basis points yesterday as a response to the virus. This has helped stocks for a little while, but the big question is how the virus will affect global production and trade on the long run. This is an important thing to follow, but investment managers do that on their own.

What do pros do?

MarketWatch came out with an article about “how financial advisers manage their money when stocks tank”. They do many of the things we advise in situations like this. Probably the most important thing that the author has found is that “the advisers I’ve worked with never sold their own investments while markets were getting hammered”. As they write, they don’t check their balances all the time, because they know “first-hand how such behavior can destroy wealth”. (We also wrote about this subject a while back.)

Another thing they avoid is trying to predict what will happen, when to jump out of and into the market. Instead, they balance their holdings according to their original plans. Every investment manager has a predefined plan for the year, which they always refine, but never throw out the window. If there are some instruments that are weak, they turn to others that are stronger.

These behaviors are exactly what we always say about discipline and diversified, professionally managed investment portfolios. We also often say that besides stocks, it’s a great idea to have gold too, because when papers struggle, precious metals gain strength. Other pros seemingly agree with us.

Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving their personal investment goals on the long term.