From the desk of Doug Wells: “Should You Invest More Money in the Stock Market?” – April 19, 2020

On Monday March 23 both the S&P 500 and the Dow Jones Industrial Average hit their current lows for the year. In a month, investors saw the market fall by approximately 35% – the quickest drop of this magnitude since the Great Depression. On top of the market correction, it became clear that each of us would be directly impacted by what days earlier seemed like a distant possibility – a global pandemic and subsequent hard stop of most of the world’s economies. If you found those early days to be scary, you were not alone. All but the most optimistic amongst us felt some degree of fear contemplating what this new reality would mean not just for our investments but also for our own personal health and for those whom we love. Full candor – it was scary for me as well.

It is now four weeks since the March market lows. We have more information on how the pandemic will impact our lives and the economy and we have seen both bad and good come out during this unprecedented time.

Sadly, we have seen the virus spread quickly to every state in our nation.  Nationwide there have been over 750,000 cases and over 40,000 deaths. Many of our favorite local businesses have temporarily closed or dramatically scaled back their services, all of us know at least a few people who have lost their jobs and most of us have been sheltering in place for over four weeks.

There has also been uplifting news. Many of our neighbors have become local heroes by opening their hearts to help others – whether that be through grocery runs for others, celebrating a child’s birthday with a drive-by parade or health care workers continuing to risk their own well-being every day to help those infected. In addition, we have seen positive news on vaccines (J&J, Moderna, and others) and potential drug therapeutics (Gilead).

While the current situation remains scary, many of us have settled into our new temporary reality. And, the stock market has done the same. Since the March 23 lows, the market has made up roughly half of its losses and rebounded approximately 30%. As we adjust and get a bit more comfortable with our new daily routine, some people are asking “If I have additional capital, should I invest more in stocks?” As with most questions, the answer is – it depends. Below are a few of the factors to consider if you are contemplating investing new money into the stock market:

What is the purpose of each of my accounts? 

Most people have several accounts, each with different goals, and you want to make sure your investments match your goals. For example, you may have several college savings accounts for your children or grandchildren, an emergency fund with 6 months to 2 years of living expenses and your retirement accounts. The right answer for one account likely will not be the right answer for all of your accounts. For instance, your emergency account should be held in cash or high-quality liquid investments (like US treasuries). Adding equity exposure to this type of account likely does not make sense. For college savings accounts, it depends on how soon the beneficiary will need the money and your ability to add additional funds should the need arise. If the college funding is needed in the next 1-3 years, adding equity exposure likely does not make sense. However, if the child does not need the funds for 7-10 years, adding some equity exposure might make sense. For retirement accounts, if you have 5-7+ years of living expenses in bonds and/or cash, it might make sense to consider investing any new money in stocks.

Timeline – Strategy: What is the investment timeline for this new money?

Each market correction is different. In some cases, new highs are reached after just a few months. In other cases, it can take a few years. And, occasionally, it can take longer. Only invest new money in the stock market that you don’t need for several years, preferably 5 years or more.

Timeline – Tactical: How quickly should I make new investments?

Trying to call “the bottom” is an expensive exercise in futility. Yes, you might get lucky but, more likely, you will miss your opportunity. Most investors are far better off splitting their money into 4-6 tranches and investing regularly over a period of time. For example, invest 1/6 th  of the new money on the first trading day of each month for the next 6 months. This allows you to dollar cost average into new investments. A quick side note. If you believe the market will be higher in several years than it is today, you actually want the market to continue to fall as you invest as it will give you a lower average cost basis for your new investment.

What is my personality?

For investing, it helps if you are an optimist who believes in a better tomorrow. Yes, the next few months, and possibly years, will be challenging. Some companies will miss their earnings estimates, unemployment will almost certainly continue to rise to previously unthinkable levels, new coronavirus infections and deaths will continue, some cities and states will have setbacks after reopening their economies and there will be other expected and unexpected challenges. However, there will also be unforeseen positive developments such as promising news about vaccines and drug therapies, success stories from hospitals, cities, and states, additional fiscal policy support from the state and federal government and more. The point is, can you weather the bad news and a declining stock market if it continues over many months? Remember, your timeline for any new money invested in the stock market should be 5 or more years. That can be a  very  long time in a negative or flat market.

What is my goal?

I would argue that your goal should be to make a series of good financial decisions over several years. You will not get every decision “right”. But, if the vast majority of your decisions are sound and your mistakes are modest, you will likely do very well over time.

Is now the right time to start?

As I write this note (Sunday evening 4/19/2020), the S&P500 is at 2,875 – down just 11% year-to-date and very close to levels last seen in October of 2019. Think about that. If six months ago you had perfect clairvoyance and knew a global pandemic was coming and it would halt the world’s economies (and many of the small businesses in your neighborhood) what would you have predicted the stock market would do? “Flat” would not have been my prediction. Yet here we are.

At these levels, it feels as though there is a fair amount of optimism regarding the re-opening of the economies around the world, the power of unprecedented fiscal and monetary policies from various governments and the progress on drug therapies and vaccine candidates. Yes, I am optimistic on what the world looks like in 2 years. However, I am also a realist on what the path to get through this likely entails. The reality is that we will have some tough weeks and months in front of us as well as some heartbreaking setbacks in our fight against this virus.  It is impossible to know when the market bottom will happen.

Given the fear and uncertainty, a course of action could be to wait and start your first tranche of investing should the market fall another 5-10% from these levels.  But be clear this carries two big risks; first, the market may not correct the amount you’ve defined as your entry point causing you to leave you funds on the sideline. Second, you can be certain the headlines will look dreadful if/when the downdraft occurs. Will you be willing to buy in the face of really bad news?

In summary, is now a good time to invest new money? Maybe. But it is definitely a good time to plan how you intend to add to your equity exposure regardless of what the market does over the next several months.

On a similar note, if you found your portfolios a bit too aggressive in your current asset allocation, it makes sense to reevaluate and possibly de-risk some of your investment accounts. Your aim is for your asset allocation to match the specific account’s goals. With the market down just 11% year-to-date and at levels close to those seen in as recently as October of 2019, it may be a good time to evaluate a change like this.

Our goal is to help you make good financial decisions; often this includes helping you avoid short-term thinking with long-term assets (or, conversely, long-term thinking with short-term assets). Please reach out to your Senior Wealth Adviser if you would like to discuss any of the ideas shared in this note and how they might relate to your specific situation. Also, if any of your colleagues, friends or family are struggling to make good financial decisions during this stressful time, please feel free to let them know about Albion. We would be honored to have a conversation with them to see if Albion can be of service.

Doug Wells
Partner
Albion Financial Group

About Albion Financial

Established in 1982, Albion Financial Group is an independent, fee-only financial planner and investment manager located in Salt Lake City, Utah.