Uncertainty has powered the incredible roller coaster ride in stock prices these past weeks and the remarkable (as well as historic) drop in bond yields.  Don’t expect that to go away anytime soon.  But do keep in mind legendary investor Ben Graham’s advice: “The intelligent investor is a realist who sells to optimists and buys from pessimists.” 

Translation: During market routs like the one happening now consider adding to your investment portfolio.

Graham’s student, Warren Buffett famously said, “Widespread fear is your friend as an investor because it serves up bargain purchases.” Translation: Now might be a good time to put some cash to work or increase your contribution to your 401(k).

My tune will rarely change on this subject. Corrections, even bear markets, create opportunities for patient investors.  According to J.P. Morgan’s 2020 Guide to Retirement, from Jan. 3, 2000, to Dec. 31, 2019, $10,000 invested in the Standard & Poor’s 500 index grew to $32,421 for an annualized total return of 6.06%. By simply missing the ten best days, that same $10,000 investment grew by half as much, to $16,180 for an annualized return of 2.44%.  Ouch.  

In recent columns, we discussed how to prepare your 401(k) for a downturn and talked about sound investing principles in the face of violent sell-offs. Stock prices may still face selling pressure as the number of COVID-19 cases in the U.S. rise. So it is still a good time to review a few facts.

What’s really moving the market

•    In the near term, no one has any idea what is moving stock prices. If you’ve been glued to the financial news networks you might be struck, as I have been, by how many pundits can tell you with certainty why stocks are trading as they are at any moment. Yet we know that in the short-term stock prices are influenced by computer-driven buy and sell programs and institutional money which moves in and out with lightning speed. Short-term moves then reflect money flows rather than fundamentals.

See beyond the moment

•    The underlying fundamentals of a company will eventually matter again. Take tech bellwether Microsoft. The stock peaked on February 10th at $188.70. After warning on February 26th that sales in the PC unit — about 35% of total sales — will come in below expectations, the stock has been hopping around like a lotto ball on Powerball jackpot night. The long-term fundamentals of the company will likely still delight investors for years and when the focus returns to fundamentals the stock price will trade accordingly.  Buffett once said: “…when a great company gets into temporary trouble…we want to buy them when they’re on the operating table.“ Consider that as you review your investments this weekend. 

Don’t get sucked into the panic

•    Human nature never changes. Panic begets panic.  The Dutch tulip bulb bubble in the 1600s, one of the most famous bubbles of all time, demonstrates very clearly what rampant speculation wrought.  At the height of the mania, rare tulip bulbs traded for multiples of the average person’s annual salary. Remain cool. And rational.   

Think about your mix

•    Diversification is always smart. I can’t add much on this topic, except to say—you should follow a prudent diversification strategy that aligns with your appetite for risk. Stocks may be down double- digits but bonds are up.  That is the point of diversification. 

Keep cash to the side

•    Keeping your powder dry is for times like these. Cash on the sidelines comes in handy when stocks decline. Consider adding cash to your stock holdings and if your bond holdings have appreciated above your target, trim those back and add to stocks to ensure your allocation reflects your goal.  Graham and Buffett would be proud.

Past outbreaks

We still don’t know the full effects of the COVID-19 virus. But we do know that during other recent crises stocks have generated positive returns subsequently.  

Dow Jones Market Data records twelve epidemics since 1981 and measures stock returns six and twelve months later.  Stocks average double-digit returns in both periods for each epidemic and there were only three negative periods recorded.

Remember that and you will look back a year from now with a larger 401(k) balance and a smile.