After falling -34% in just 23 trading days during the first quarter of 2020, the S&P 500 is now roughly half way back to the record high reached in early February. (Suzuki, Dan “Anatomy of a Bear Market.” RBA Quick Insights, March 16, 2020) No one knows what lies ahead for the planet, never mind the market, in a Shelter-in-Place, Covid-19 world, but here are a few thoughts:
1. Cash Reserves – If you don’t have 6-12 months of committed expenses in cash, short term CDs or money market, consider planning for it. No one knows how long this rally will last and you don’t want to be forced to sell if we have another large downturn. This is particularly important if your income has been, or might be, interrupted. And to be clear, I mean pure old cash – the kind earning around 0% right now. Bonds and bond funds are also important but right now I am talking about pure, simple, cash deposits.
2. Right size your expenses – If your household is anything like mine, the difference between discretionary and non-discretionary spending has never been clearer. Of course, I am not saying we should keep up this shelter in place, only the bare essentials, mentality. I do think many of us can benefit from cutting down on some unnecessary expenses; especially people living mostly or entirely on their portfolio.
And perhaps most importantly,
3. Be prepared – The recent pullback of over 20% in the S&P 500 and Dow Jones Industrial Average, technically put us in a “bear market.” (Suzuki, Dan “Anatomy of a Bear Market.” RBA Quick Insights, March 16, 2020) While it is possible the worst is behind us, the average bear market lasts over a year and the average “years of gain” lost in the S&P 500 is 3.2 years. Source:
Richard Bernstein Advisors LLC* Anything could happen but this would suggest we may have a lot longer and lower to go in the market. There are typically several “bear market rallies” of over 10% even when the larger trend is still down. So, unfortunately, the recent rally does not necessarily mean the worst is behind us. The previous two bear markets lasted 30 and 17 months, respectively. Source: Richard Bernstein Advisors LLC*.
No matter what lies ahead, I would suggest committing to riding out the ups and downs. If, however, the last 6 weeks have you convinced that your risk profile needs updating, now might be the time to lighten up on stocks.
I am also suggesting many clients keep some cash on the sidelines in their investment accounts to be able to buy if the bottom once again falls out on the market. This is in addition to cash reserves for committed expenses. Having cash in your portfolio during a market sell off serves two roles:
- It cushions the blow as the cash balance doesn’t go down in a sell off.
- It gives you some “dry powder” to try to add to your portfolio.
As always, we are here to help. If we can answer any questions or give you a second opinion on your portfolio, please don’t hesitate to get in touch.
Be safe and be prepared.
Robert F. Carrigg, Jr., CFP®
rob.carrigg@stewardpartners.com
603-427-8840
* Suzuki, Dan “Anatomy of a Bear Market.” RBA Quick Insights, March 16, 2020
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