The novel coronavirus outbreak has triggered a roller coaster for U.S. financial markets and sowed widespread uncertainty in the global economy as a whole. While the markets seesaw and daily headlines induce anxiety, experts say everyday investors should keep their gaze focused on the long term.
Markets plummeted as trading opened on Monday, enough to trigger a temporary trading halt by the New York Stock Exchange. The 15-minute halt was caused by an automatic circuit breaker safety mechanism that kicked in to prevent a free fall after the S&P 500 plunged by more than 7% within minutes of markets opening.
Monday’s market rout comes after a volatile two weeks: the Dow suffered its worst week since the financial crash of 2008 two weeks ago as fears of a pandemic delivered a massive blow to certain industries and supply chains. Last week, however, hopes of government intervention saw the Dow post its biggest single-day point gain in history on Monday. On Tuesday, the markets plummeted again, and throughout the week the whiplash continued.
Focus on your long-term financial goals
“When markets go crazy like this, it is pivotal that investors consider their own time horizon,” David Bahnsen, the chief investment officer at The Bahnsen Group, told ABC News via email.
If principal money is needed in one to two years, it should not be in the stock market, he added.
“If, on the other hand, the money’s use has a longer-term time horizon, investors should let history be their guide about market recovery, the ebbs and flows of market volatility, and most importantly, how downside volatility can help them,” Bahnsen noted.
Over longer periods of time “a huge percentage of the return an investor will receive from the stock market comes from reinvested dividends,” he said.
As uncomfortable as it may be, downside volatility “is your friend” if you are adding new money to your 401(k), reinvesting dividends and maintaining a long term approach, Bahnsen said.
“The present volatility is a roller coaster, and roller coasters go up and down,” he said. “It will settle in due time, but for now, investors should expect it to continue, and to be a poor environment in which one can make rational and thoughtful decisions.”
In situations of widespread uncertainty like this, Bahnsen recommends assessing your own personal risk tolerance and diversifying investments.
“An intelligent asset allocation that is designed around your risk tolerance and is truly diversified is your best defense against coronavirus market volatility,” he said. “And it will be your best defense against the next bout of market volatility as well.”
Bankrate’s Senior Economic Analyst Mark Hamrick told ABC News that “to the extent that we are all human, we need to keep in mind that two of the biggest emotions that drive stock prices are greed and fear.”
“The No. 1 job for investors right now is to try and contain fear,” he said. “We have to remember that this too shall pass.”
Hamrick reiterated that now more than ever is the time to focus on the long-term financial goals. For most people who have retirement savings in stock markets, “that money will not even be utilized for years, if not decades, into the future.”
Even for those closer to retirement, “the reality is that they have every reason to believe they are going to live long lives,” he added.
“Try to adhere to your long-term financial goals, that means remaining invested in the stock market and continuing to focus on savings and paying down debt,” he said. “Because the reality is those are effectively timeless financial goals.”
“Sometimes people view these market down drafts as a true threat, and the reality is that at some point they probably need to get away from some of the information that seems omnipresent these days, and try to focus on the long term,” Hamrick said.
Amid a ‘short-term shock,’ some see a ‘golden buying opportunity’
The uncertainty around the coronavirus outbreak and its potential economic impact is causing a “white-knuckle fear factor among investors,” analyst Daniel Ives, the managing director of equity research at Wedbush Securities, told ABC News. “And I think right now that’s the biggest overhang on stocks.”
“The Street’s worried about earnings coming down and demand being impacted globally, and right now there’s more questions than answers from the perspective of investors,” he added.
Still, Ives said, “Right now, I view it more as a short-term shock.”
Ives noted that as data points come out from China and elsewhere, “you’re starting to see the stocks reflect the bad news before earnings have been lower,” he said. “So, actually what’s happening is that the market is pricing in a 10 to 15% cut to earnings across the board, which may or may not happen.”
“In 20 years of covering stocks on Wall Street, this is definitely up there with some of the more nervous I’ve seen investors, but I don’t think the nervousness matches the sell-off I’ve seen, which isn’t warranted,” he added.
For investors who are willing to look past the next six to 12 months, “I view this as a golden buying opportunity,” Ives said.
The Wall Street veteran also recommends drowning out the noise as much as possible and staying focused on your financial goals, saying he believes it’s “a negative news cycle and a social media world” that is scaring investors the most.
“In my opinion, the way to handle these situations are stick with the winners and the technology themes for the coming years — in terms of streamings, cloud computing, cyber security, 5G — and turn off the television,” Ives said. “It’s a pause of the tech bull cycle, not the end.”
Still, Ives said that investors should gear up for a roller coaster at least in the short term.
“I view it more as a buying opportunity for those investors that have a longer-term time horizon,” he said. “It’s a hand-holding period, but I think right now the bark is a lot worse than the bite.”
“For the average investor, this is going to be a roller coaster over the coming months, and it’s one where you need the stomach for the volatility just given what the coronavirus outbreak is creating globally,” he said. “If you don’t like roller coasters, then you should probably take some chips off the table because it’s going to be a pretty volatile ride over the next few weeks.”
Hamrick, of Bankrate, noted that there are also opportunities amid the volatility for Americans to ramp up their savings.
“There is an opportunity right now that ultimately could help to accelerate savings, and that is that mortgage interest rates have fallen to historic lows,” he said.
In a recent annual Bankrate survey, Hamrick said that American’s biggest financial regret has “consistently been the failure to save for emergencies and the failure to save for retirement.”
Times of economic uncertainty “really kind of puts that to the test,” he added. “Once we get beyond this, we hope that people will remember that.”
“As we like to say, pay yourself first by having an automated direct deposit savings account so we can get through challenges such as temporary unemployment,” he said. “You need to have an emergency kit. Think of a savings account as an extension of that.”