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The Corona Crash of 2020 will forever be remembered as one of the most dramatic times in stock market history. In thirty days, the S&P 500 lost nearly 29% of its value, plummeting as the pandemic led to a rush on grocery store shelves and retirement savings accounts. While the chaos ensued long after March – in fact, it still is – the markets have recovered.
Never before have we seen such an economic response, with the Federal Reserve and Congress working in tandem to shore up the markets to prevent a fate similar to Atlantis. The tidal wave of money and ensuing policies did their jobs, and by August, the S&P 500 recovered. As for small-cap companies and the global economy, November that year saw their resurgence.
During the chaos, a self-perpetuating circle of hysteria led the markets and everyday life into an abyss filled with panic. At the time, I worked as an advisor for a prominent investment firm, trying my hardest to dissuade clients from selling their entire portfolios. While anchoring portfolios into cash made sense for some individuals with immediate financial needs, many did not need funds. Instead, they were being sucked into panic by the news and their coworkers.
See, being an advisor is half-educator and half-emotional support counselor. Your job is to educate clients on what is best for their situation – that is what being a fiduciary is, after all – and to pull them back from making haste decisions. During the plummet, I continued to pour my heart into every consultation to try and figure out the best solution for my clients’ newfound difficulties. However, I could not stop the drop; but, I knew it would stop eventually. For the markets to reach zero means that society as we know it is gone. If this were to have happened, money would have been useless anyway. So, I preached the adage of staying the course and weathering the storm.
The majority of my clients listened, and while some did not, that is understandable. Many people had lost their jobs or loved ones in perhaps the greatest humanitarian disaster of the century. Notably, COVID-19 is not gone, and outside of the United States, many countries are still living through its horrors. Investing is not for the faint of heart, and that is why I advocate knowing your risk tolerance. If you sell during a drop, it means You’re Investing Wrong.
However, there were lessons to be learned. Those who stoically remained invested have come out ahead, significantly. The markets in mid-2021 are now flirting with record highs, showing the importance of time in the market, not timing the market. If you want to be successful as an investor, create an investment mission statement. In it, define how much risk you are comfortable taking using this guide and set up an automatic investing plan that puts money into the market for you, with no emotions involved. Then, when hysteria ensues, unless your situation dramatically changes, stick to it and remind yourself what your end goal is. Having a plan in place is the secret to success, as you remember what you are working toward: Freedom.
Sometimes the market will drop beneath your feet. While the feeling is gutwrenching, historically, the markets have recovered, and this is why you diversify your investments. By choosing a couple of good investment funds and dollar-cost-averaging with automated investments, you are more likely than not to reach financial freedom. So, make a plan and stick to it; the markets will take care of the rest!
Mile High Finance Guy
finance demystified, one mountain at a time
Hey Olaf, nice article and good reminder to periodically check your risk tolerance and your investment horizon. It is also why I like diversifying not only within stocks and bonds (ie index funds) but also outside with things like long-term direct investment in real estate, cash reserves and a little crypto. I am also digging in medium-term investments (5-7 years) like passive real estate investing platforms like Fundrise and private equity opportunities. Although some of these may add more risk to my portfolio, I am investing for the long-haul and feel comfortable doing it given the diversification in my overall portfolio.
Thanks TREC, comfortability is key! Plus, the longer your time horizon, the more risk you can inherently take on.
How have you liked Fundrise so far compared to publicly traded REITs?