What to tell clients about this shocking market volatility

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Recent headlines are pretty scary and hard to take. The first one I saw today was “Stocks Plummet, Triggering Circuit Breakers.” The coronavirus fears are to blame. What should we do now? What should we tell our clients?

Pandemics, like the diseases themselves, run their course. The coronavirus will also run its course, as will its impact on global markets. I admit that my nerves are frayed and my two systems of thinking are locked in a not so polite debate. While the knee-jerk response of my instinct screams get out of the market now, my logic assures me I should stay the course and buy more.

Acknowledging the pain is critical as we move forward. Sure the market is down about 19.5% as of March 9 from the all-time high reached only three weeks ago on February 19 as measured by the total return of the Vanguard Total Stock ETF (VTI). And, sure, it is both the speed and the magnitude of this correction that is so emotionally jarring.

But have some perspective. The record bull turned 11 years old today and is still going as we haven’t yet hit a bear. Of course, that could change tomorrow. Even after this correction, the total return of VTI over the past 11 years is 411% or 16% annually. That’s the real shocker I think.

My consistent take is that what is really shocking about this market is not its recent swan dive, but rather the sustained highs of the last 11 years and what that phenomenon has done to our collective expectations. After long bull markets, it is human nature to expect things to continue and think we can take on more risk than we think. I wish I had a dime for all the times I’ve heard and read lately that a 100% stock portfolio has no long-term risk vs. a balanced portfolio that includes high quality fixed income.

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Though I suspect volatility will continue for a while, keep in mind that:

  • Stocks are 19.1% better buy today than they were on February 19.
  • Capitalism will survive the coronavirus.
  • Selling after a down market doesn’t work in the long run.

I tell clients I bought more stock index funds recently; not because I had a clue what stocks would do going forward, but because I had to stick with my asset allocation target. That’s the same reason I had to lighten up on stocks during this long bull market.

We must learn from our mistakes. There is quite a bit of data indicating that advisors timed the markets poorly during the financial crisis. The most common excuse I heard was “my client made me sell.” Back then, I found telling clients I was buying gave them some comfort that, if stocks never recovered, I was going down with them. It's also important to remember that worldwide viral pandemics occur on average every 25 to 30 years. "That's long enough for us to lose our memory of how bad they can be and to lower our guard on preparedness,” writes Carolyn McClanahan for Financial Planning. McClanahan is both a doctor and a CFP.

Investing is simple but not easy. Down markets really separate speculators from investors. Tell clients to fasten their seat belts — there is turbulence ahead.

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