Columbia Pictures/Courtesy Everett Collection
The plot, the script and the characters may have changed. But we’ve seen this movie before.
The current stock market swoon strikes many folks as unprecedented: It’s the frantic financial sideshow to a devastating global tragedy—one that’s seen 1.1 million people fall ill and 60,000 die, with every expectation that the numbers will be many multiples worse before the COVID-19 pandemic is over.
Yet, on closer inspection, 2020s bear market doesn’t seem so different from earlier market declines. Once again, we’re being reminded of some crucial facts of financial life. Here are seven of them:
1. Our risk tolerance isn’t stable.
Rising share prices turn us into fearless stock jockeys , while tumbling prices reduce us to cash-loving cowards . What about “buy low, sell high”? At times like this, investors toss such basic commandments out the window.
Indeed, I’ve been fielding panicked emails from readers for the past month. I tell folks to think about what sort of portfolio they would feel comfortable holding today and then, once the stock market recovers, they should build that portfolio. But guess what? It’s advice I’m 100% confident will be ignored. Many of these folks will sell stocks now, only to renew their embrace of risk when the market is hitting new highs.
2. Losses wreak havoc with compounding.
If you had invested $100 on Feb. 19, when the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.17% notched its all-time high, you’d have been down 34% to $66.08 by March 23. That’s when the S&P 500 hit its recent low. What will it take to recoup that 34% loss? To go from $66.08 to $100, you need a 51% gain. As of yesterday’s market close, we’ve clawed back 11%. I’m confident we’ll eventually recoup the rest.
Still, this highlights the brutal impact of losses on investment compounding. Don’t want it to be so brutal? You can avoid far steeper losses by diversifying broadly and keeping at least some money in bonds and cash investments. You can also speed your portfolio’s recovery by rebalancing during the market decline and by adding fresh savings to your stock portfolio.
3. In Treasurys, we should trust.
During 2008’s financial crisis, Treasury bonds posted gains, while almost everything else lost ground . It was yet another lesson many folks failed to learn. Indeed, in the hunt for something that’ll post gains when stocks are suffering, many investors stubbornly ignore Treasurys, while embracing all manner of costly, complicated and unreliable alternatives.
Among them: hedge funds , “liquid alt” mutual funds , real-estate funds and bitcoin . I’ve largely soured on alternative investments, with the exception of gold stock funds . And even gold stocks require a remarkably strong stomach for volatility. Still, they have once again proven their mettle (pun intended) at a time of market mayhem.
4. Bonds are less risky than stocks—except when we go to trade.
Many investors are scratching their head over the recent bond market weakness , which saw steep short-term losses among municipal and corporate bonds. What went wrong? A key problem: The bond market is far more fragmented than the stock market.
For instance, Vanguard’s Total Stock Market Index Fund /zigman2/quotes/202876707/realtime VTSMX +0.05% tracks the CRSP U.S. Total Market Index /zigman2/quotes/206402661/realtime VBMFX +0.18% , which contains 3,500 stocks . By contrast, Vanguard’s Total Bond Market Index Fund tracks the Bloomberg Barclays U.S. Aggregate Float-Adjusted Index, which includes more than 11,000 bond issues.