The purpose of a risk management plan for your investments is to know in advance what steps you will take, if any, when the market declines. The market goes up and down on a regular basis, but down moves that approach 10% are concerning to investors.
The market was overdue for a pullback following a strong 2019 and the Dow rising even more to cross 29,000 points in mid-January. When the news of the coronavirus broke in late January that was a catalyst for a decline and the market lost all the January gains and ended the month flat. When it seemed that health organizations had things under control, the market went up strongly in the first two weeks of February, recovering January losses and more. This week we faced a sharper decline on news of more outbreaks around the world. The first two days this week have taken back all the February gains.
The big question on everyone’s mind is where do we go from here? Is this going to get worse before it gets better? And how long will it take before it gets better? No one can know the severity or the length of time involved in this downturn. One thing we do know is the market does not like uncertainty. An event like the outbreak of the coronavirus is unpredictable and investors run from it. Panic is never a wise reaction to any emergency, and it is important to stay calm and make measured decisions. This is why we operate with investing rules. We believe it is important to know what the plan is before the market starts to tumble.
For some investors diversification is an important strategy to reduce losses. Portfolios that are diversified in bonds, gold and other assets often mitigate stock market declines. We go a step further and identify levels where it is prudent to reduce stock exposure or even move out of stocks to cash or bonds. In light of current market conditions we are watching accounts carefully and following our risk management rules which are already in place.
We should expect continued volatility with wide swings in both directions until the coronavirus is contained. There is a likelihood of lower prices before this is over.
One final thought is the US economy is strong. We are in the midst of an economic boom and as a nation, we are in a much better place to deal with an emergency of this nature than if we were in a period of recession.
If you would like to review your account, please contact us. We will be happy to meet or call to discuss with you.