Find Your Specialist


Contact Us

    Go Back

    The Market has Caught COVID-19, Time to Think Long-Term

    By: Tony Welch | Director of Investments, SignatureFD

    The World Health Organization describes the symptoms of COVID-19 as flu-like in nature. Runny nose, sore throat, cough, fever and even difficulty breathing in severe cases. The stock market has probably elicited some of those same physical responses, or at least their mental equivalent, by careening into bear market territory at the fastest rate in history. This all comes on the heels of a phenomenal 2019, which saw the popular benchmark, S&P 500 Index, return 31%. It represents an incredible reversal, indeed. Last year’s entire bull market was wiped out in a matter of weeks.

    Of course, the sell-off hasn’t been completely without merit. Economic data in China, where they took extreme measures to control the spread, has been atrocious. The latest data in the U.S. has begun to deteriorate, as well, and there is no doubt that millions of Americans properly practicing the new art of social distancing will result in further economic weakness ahead, which will drastically affect corporate earnings. That’s important because stock valuations (i.e. the price of a stock divided by the company’s earnings) entered the year at record highs, by some metrics. They did so because the market expected a strong earnings year, not a coronavirus-induced earnings recession.

    Over the short-term, stocks can be quite volatile as they work to discount an uncertain future. We do not know how long the virus will impact our economy and those of other nations around the world. But, in crisis events like this one, it becomes even more important to think long-term and strategic. We are strong believers that an attempt at short-term market timing is one of the quickest ways to derail a well thought out financial plan. An annual study by Dalbar¹ illustrated the following last year: through the period from 1994 – 2018, the average U.S. stock fund investor made 4.6% per annum. Not too bad, but their average return was half that of the S&P 500’s return of 9.1% per annum, in the same time period. They looked at municipal bond funds, as well. U.S. muni bonds returned 3.3% per annum in that time period while the average muni fund investor returned 0%.

    Why? Because it is difficult to actually follow a buy low, sell high timing discipline. Market lows are typically carved out in a period of time where a crisis feels like it will never end. It’s not easy to plug our nose and buy in that environment. Market tops typically occur when it seems like the party will go on in perpetuity. Because the market provides a constant fight with our own behavioral biases, a better alternative to market timing is one that leans into and away from risk but remains anchored to one’s long-term investment mix.

    So, what should an investor with a long-term mindset begin to expect from here? While valuations are not the best market timing tool in the world (which is fine because we want to take a long-term mindset), they have been terrific at framing our risk and reward over the next decade. We already noted that the market came into the year with elevated levels of valuation. Historically, 10-year market returns have been lower than average when valuations were extended in such a manner. But, now that we’ve weathered a large drawdown, valuations are much lower. From these valuation levels, returns have been inline with those historic averages we cited above.

    In real-time, crisis events like COVID-19 have a real human cost. They also can have a big market impact. But, they are impossible to forecast in advance and can be even more difficult to successfully trade in and out of, especially since our own emotions can play a huge role. The true power in stock market investing has been in taking a long-term mindset, setting a strategic allocation that fits your needs, and staying the course. This crisis has created a very swift dislocation, but the good news for a long-term investor is it creates an opportunity for higher future returns. While the news flow is focused on the sensational and the day-to-day, from an investment perspective, now is a great time to tune it out and think long-term.

    1 Dalbar, “Quantitative Analysis of Investor Behavior”

    About SignatureFD

    True Wealth Is Bigger Than Just the Accumulation of More

    We believe in helping our clients achieve wealth beyond money – financial security is just the first step. That’s why our focus isn’t just on your net worth, it’s on your Net Worthwhile™.

    Net Worthwhile™ is the shift from an Accumulation of More mindset to one focused on the Achievement of Better — helping you define how you can use all elements of your wealth to live a more fulfilling life. So, no matter what people and causes are important to you, our financial design solutions will help you grow, protect, give and live your wealth.

    What’s Your Net Worthwhile?™

    Learn More: https://www.signaturefd.com/

    Related Articles

    • 01.25.2023

      A New Year Means New Privacy Laws

      Ever since the General Data Protection Regulation (GDPR) came into effect in May 2018, US state privacy laws have been passed in Virginia, Colorado, Connecticut, Utah and, most pressing of them all, California. The California Privacy Rights Act (CPRA) went…

      Continue Reading
    • 01.19.2023

      The New Rules Under Section 174

      Internal Revenue Code Section 174 has long been used by taxpayers to deduct certain expenses related to research and experimentation (R&E) in the current year.  The code section was originally enacted in 1954 to eliminate uncertainty in the tax accounting…

      Continue Reading
    • 12.20.2022

      IRS Customer Service May Improve in 2023

      With 4,000 new customer service representatives and plans to hire 700 new Taxpayer Assistance Center (TAC) employees, taxpayers soon may get relief from endless hold times, no in-person help and unresolved problems.

      Continue Reading
    • 12.12.2022

      Reduce Taxable Income with IRA Distributions Transfers

      IRA owners who are age 70½ or over can transfer up to $100,000 per year to charity to reduce their taxable income. These transfers, known as qualified charitable distributions or QCDs, offer end-of-the year tax savings and can count toward required minimum distributions (RMDs) that taxpayers who are age 72 must make each year. Think of it as a tax-free charitable rollover of IRA funds.

      Continue Reading
    • 12.02.2022

      UK R&D Tax Reliefs – Where Are We Now?

      In the November 2022 Autumn Statement, the Chancellor announced significant changes to the current Research and Development (R&D) tax reliefs. The key announcements were a change to the applicable rate of the Research and Development Expenditure Credit (RDEC) and a…

      Continue Reading
    • 12.01.2022

      1099s Required for 2022 Tax Year

      Taxpayers earning income from selling goods or providing services may receive a Form 1099-K, Payment Card and Third-Party Network Transactions, for the first time in early 2023, when the 2022 forms are due. The requirement to file Forms 1099 have…

      Continue Reading
    • 11.28.2022

      IRS Uncovers $3.1 Billion in COVID Fraud

      The IRS Criminal Investigation department (IRS-CI) has partnered with the Justice Department to uncover and prosecute fraudulent activities related to the federal government’s COVID relief programs. To date, the IRS has conducted 840 investigations involving fraud amounts totaling more than…

      Continue Reading
    • 10.25.2022

      IRS Inflation Reduction Act Increases Funds

      The Inflation Reduction Act of 2022, enacted in August, increased funding for the IRS by $80 billion through 2031 for enforcement activities, operations support, systems modernization and taxpayer services. The legislative language, Treasury Secretary Janet Yellen and IRS Commissioner Charles…

      Continue Reading

    Privacy Overview

    When you use or access the Site, we use cookies, device identifiers, and similar technologies such as pixels, web beacons, and local storage to collect information about how you use the Site. We process the information collected through such technologies, which may include Personal Information, to help operate certain features of the Site (e.g., to prevent online poll participants from voting more than once), to enhance your experience through personalization, and to help us better understand the features of the Site that you and other users are most interested in.

    You can enable or disable our use of cookies per category.
    Always Enabled