Coronavirus Crisis: Should I Buy or Sell My Investments, or Neither?

When the stock market suffers a “crash” of significant proportions, the most common question asked by those with a position in the market is: Do I buy, sell or do nothing?

I happen to be a chap who tends to do nothing…well, not nothing. Those who follow this blog are aware that I favor mutual funds, particularly index funds. And as a general rule, all earnings from these funds – dividends, bond interest and capital gains – are automatically reinvested. In the three major market corrections I have experienced (and several minor ones), I haven’t veered from this practice. In a manner of speaking, I dollar-cost average as rule of thumb.

COVID-19: This Too, Shall Pass

Without question, the Coronavirus pandemic has caused a medical crisis of immense proportions, and in its wake, is creating an extremely chaotic stock and bond market upheaval. But from a historical perspective, there is little reason to panic. The economic impact of these dreadful events do dissipate over time. Fourteen S&P 500 bear markets (losses of greater than 20%) have ravaged investors since 1929. The shortest, a 20% bear market, occurred in late 1990, lasting less than three months. The deepest, an 86% doozy, roamed from September 1929 till June 1932. The longest, a 60% growler, lasted from March 1937 to April 1942.

On average, these dozen or so bear markets declined an average of 39% and lasted 19 months. And such short-term market conditions do create opportunities for savvy investors. I’m not suggesting that folks ignore short-term consequences, but neither should they abandon their PDQ Principles of investing going forward.

Dollar-Cost Averaging…Up Or Down

Everyone has his or her own personal circumstance when it comes to deciding what to do in the event of a major correction. Some folks simply must sell into a downturn because of extenuating circumstances, in which case, it is what it is. If you happen to be an individual not in that situation, my experience has been to stay put. However, if your question is should I sell or should I buy (ignoring the stay-put scenario), then I would suggest in either case to do it gradually as opposed to going all in. In short, if you decide to sell to avoid major damage, do so on a measured basis as opposed to selling all at once. Conversely, if the market seems to be offering you some amazing opportunities, buy, but again do so in a measured way.

Doing Nothing

Major corrections tend to surprise us even when alarming trend lines are stirring our suspicions. For this reason, we tend to want to join the herd in reaction to these suspicions. By selling into a dip, one of two things is likely to happen. You’ll lock in losses, perhaps unnecessarily, or you’ll lock in gains, creating a taxable event, again perhaps unnecessarily. And then, after a bottom is found, when do you get back in…if ever. It’s not unusual for people to miss 20… 30… 40% of a recovery before they convince themselves that the market has rediscovered its footing.

That Buffett Fellow Again

When we experience one of these gut-wrenching market declines, I’m reminded of what Warren Buffett, the Omaha sage, wrote in his 2016 annual letter to Berkshire Hathaway stockholders. Mr. Buffett is an astute investor who views bear markets as opportunities… the louder the growl, the bigger the opportunity. He penned the following in 2016:

“Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do.” Mr. Buffett, a modern-day (but more philanthropic) Scrooge McDuck, has been swimming in a pool of $130 billion, waiting for such an instance. But he’s a patient man, and I suspect he’s dragging out those washtubs as we speak… at the same time fostering great sympathy for the tragic medical impact the coronavirus is having on so many families."

Bear Market Plus

All other things being equal, bear markets are real world opportunities… regardless of the causative factors… that many folks too frequently turn into financial negatives. What’s the old saying, “Be patient, this, too, shall pass.” And based on past experience, it often passes rather quickly. Do the commonsense things that matter. Make high-quality, low-cost, well-diversified investments and exercise the necessary patience to let them work for you over the long term. You may not be able to employ Mr. Buffett’s washtub approach but practicing those PDQ Principles might enable you to dig out a tablespoon or two… perhaps even a teaspoon might work for us lesser mortals.