Drawing from experience to navigate uncertainty
These past several weeks are a good reminder of the value of humility in facing something not seen before. There potential economic implications of COVID-19 are significant, and there are learnings from past crises, even if they were different.
Back to basics
It is very difficult, but especially important, to rely on fundamentals at times like this. The disruption that COVID-19 brought forces all people to get back to basics quickly: focusing on health and safety, food, supplies, families, friends, and communities. From a financial perspective, many of the critical things that people put off during more typical times suddenly take on a greater sense of urgency. For example, make sure you have emergency cash reserves set aside and have estate documents and healthcare durable powers of attorney in place or updated as desired.
Preparation and discipline
What do financial professionals worry about in terms of the economy and markets? Not a pandemic specifically, but this type of unforeseen event, that is swift and dramatic and outside of anyone’s control. This is why it is important to plan and prepare for a range of circumstances. This is why people should invest for the long-term while ensuring that shorter-term needs and contingency planning is in place. It is also why asset allocation and true diversification in investment portfolios is so important. Diversification lessens some of the volatility and drawdown risk investors face in environments like this. Additionally, the investment discipline inherent in rebalancing portfolios and managing tax-loss harvesting uses the market volatility brought on by uncertainty to your long-term advantage.
Patience is a virtue… and is required
While first-quarter 2020 economic data, including GDP and unemployment, is very weak, it is clear it is the result of an intentional response to the health crisis, not an economic crisis based on structural problems like was the case during the Global Financial Crisis. The Federal Reserve and Congress have responded with short-term rescue and economic stimulation programs to help individuals and small businesses. The medium-term impact is only speculation at this point, though we know that over the long-term the economy as a whole is resilient. Consumer activity is always a strong driver of economic activity and it is hard to predict if they will respond with pent-up demand or some wariness once the economy restarts. Restarting and recovery may be gradual and bumpy, but it will happen. Remember too that the stock market often over-reacts in both directions. A fast stock market drop may over-state the economic problem, and a fast initial recovery may understate the short- or medium-term challenges, and volatility is often the result of the market trying to find its way. Staying focused on the short-run with your job, income and health is important, and keeping a long-term focus for your long-term investments is also very important.
WealthStep wishes you good health and strength as you weather these times.