Investor Behavior During a Global Pandemic

On February 19, 2020, the S&P 500 reached a new all-time high (closing at over 3,386). From there, no one could have predicted the coronavirus or the impact it would have on our society.  Having received many questions during this time, I want to focus on three that are key for long-term successful investing.

What can history tell us about pandemics and the market’s reaction?

Although each crisis is unique, coronavirus does show some similarities to the Spanish flu of 1917-1918. Spanish flu infected 1 in 4 Americans and took the lives of approximately 1 in 150.  It also negatively impacted the stock market with a 40% down-turn, which then led to a 1 ½ year full recovery.  Although we do not have complete coronavirus data, to this point, it has infected less on a percentage basis and taken the lives of approximately 1 in 5,500.  In relation to the stock market, as it sits today (on 5/5/20), we have seen a 34% correction and a 19.43% recovery.

When might the financial markets recover?

Throughout American history, there have been 4 significant long-term bear (bad) markets. In every scenario (including The Great Recession and Depression), the market’s low to full recovery took no more than 4 ½ years. The bottom line… historically, stock market recoveries take a matter of months and years, rather than decades.  We do not know how long or severe this correction might be, but with the above information, a historical worst-case scenario would see recovery in a matter of years.

As an investor, how can I position myself for a full recovery?

Positioning a portfolio for full recovery takes proactivity, a goal-centered financial plan and following the rule of “buying low and selling high.”  Aligning financial goals to specific timeframes allows a portfolio to hold the appropriate mix of cash, bonds and stocks long before any volatility occurs.  If short-term goals exist within your financial plan, it is important to have safe cash and bonds that allow for both the downturn and withdrawals.  On the other hand, if all financial goals are long-term, it is important to allow stocks the space to recover during times of volatility.  In every decade of U.S history the stock market has experienced new all-time highs. Investors that know this and follow the above rule are more likely to have their portfolios recover and also participate in new market highs.

*This article was written by Michael J. Purifoy, CPA, CFP®, Executive Vice President, Southwestern Investment Group and Wealth Advisor, RJFS

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