The volatility of U.S. stock markets now mirrors the uncertainty of the world economy.
In recent weeks, the value of stocks has been going up and down as investors scramble to determine whether to sell their stocks because different industries such as hospitality and food have fallen victim to the unknown that surrounds the COVID-19 global pandemic.
According to CNBC, the Dow Jones Industrial Average and S&P 500 both had their worst first quarter ever. The Dow closed the quarter down -23.2%. It was the worst quarter since the fourth quarter of 1987. The S&P 500 closed down 20% for the first quarter. That was its worst quarter since the fourth quarter of 2008.
Despite the downturn and fluctuation, Charles Zhang, founder and CEO of Zhang Financial, said this is not the time to panic.
“Please don’t focus on one month’s return or two months’ return,” he said. “People are always confused about this, saying ‘I lost 20% this month and if I continue to do that, in five months I will have nothing.’ That is not logical because, for the next five months, it will not be down every month 20%. We always tell clients, look at one-year returns, two-year returns, three-year returns, don’t look at a one-month return.”
A result from a study commissioned by Towneley Capital Management and conducted by professor H. Nejat Seyhun at the University of Michigan showed that 96% of market gains occurred in 0.9% of trading days from 1963 to 2004.
As a result, Zhang said investors must stay in the market because people will be missing that 0.9% of trading days and the resulting higher returns.
In addition to being aggressive in maintaining extreme patience during this volatile time, he said, investors always must be smart and assess the risk level in the amount they can afford to lose in the short-term.
In an effort to lower the risk factors, Zhang said diversifying investments in different industries and categories can possibly prevent major losses. He said now might actually be a good time for investors to rebalance their portfolios.
Jeff Pauza, senior wealth management adviser at Greenleaf Trust, agreed investors can minimize financial losses through proper portfolio rebalancing.
“A properly diversified portfolio that would be the outcome of these comprehensive plans that were created for clients typically has several assets that are performing well even during a market sell-off,” he said. “When we have some assets that are doing really well, we have the ability to use some of these securities as a form of ‘dry powder,’ or essentially we can redeploy some of our assets that are performing well into areas of the portfolio that have sold off and look more attractive. That strategy of rebalancing keeps the portfolio aligned with the pre-determined asset classes.”
Another way to minimize financial loss, Pauza said, is through tax loss harvesting.
“If a portfolio has some securities that are trading right now below their current cost bases — so, below what a client or investor put into that investment — you can consider selling those securities, capture the loss and now use the realized loss you have to offset any future capital gains from that portfolio,” he said.
With the uncertainty in the stock market, Zhang said now is a great time for young people to create their own business.
“A lot of good businesses were started in 2009, during the financial crisis,” he said. “Uber was started in 2009, so you can start a new business from this moment.”
Pauza said young people can take advantage of the lower interest rates that are now available and utilize the increase in short-term loans that the federal government is issuing to banks.
Although the COVID-19 pandemic has created some uncertainty in the economy right now, it is important to look long-term, according to both advisers, while evaluating the risk level the downturn may have on your assets and take the necessary steps needed to withstand the fluctuation in the market.
“Being optimistic doesn’t mean you have to be happy all the time,” Zhang said. “It just means that when times are tough, you know there are better days ahead.”