Once again, those of us living our third act are reminded of the vulnerabilities that come with age. The possibility of a COVID-19 pandemic has everyone concerned for their future health and, according to medical professionals, we are its most vulnerable target.
There is plenty of critical advice being provided by medical experts to protect your health. Wash your hands. Don’t touch your face. Stay home if you feel sick. Don’t panic.
What about protecting your wealth? Similar common-sense guidelines also apply to your investments. However, these start with emotional control. Do not panic. Properly structure your portfolio for your tolerance for market volatility and your need to take risk. If it isn’t so structured already, now is the time to fix it. The worst thing you can do is what many did in late 2008. Far too many investors sold their stocks, planning to get back in when the market stopped falling. When it did, many believed it was just a temporary bounce and waited for stock prices to fall again. They waited and waited and waited. I have talked with some, on my radio show, who are still waiting.
One of my favorite ancient proverbs advises, “The best time to plant a tree was twenty years ago. The second best time is today.”
There is no wrong moment to be invested. Some are just more right than others. The best time to invest is when you have money. The best time to take it out is when you need it. In between those times, you must protect against only one thing, your emotions.
The global stock markets hate surprises and react badly to them—temporarily. Yet they tend to recover quickly, because they love profits. Do you remember the last time the U.S. stock markets fell by more than 10%? Most will guess 2008, but the S&P 500 dropped a full 20%—the definition of a bear market—between October and December 2018. If you had liquidated your equities during that scare—triggered by trade war fears—you would have missed a 31% increase in 2019.
To make up the increasing frailty of age, we have the advantage of decades of experience and, hopefully, wisdom. We have seen terrible things happen. A few of us can even recall the closest humanity has ever come to the total destruction of our global economy. World War II.
We feared a nuclear war in the ‘50s and ‘60s. In 1968, a global pandemic—the Hong Kong Flu—killed more than a million people (if you were wondering, in 1968, the S&P 500 returned almost 6.5%). Stock prices crashed in ’73 and ’74. Inflation ate up income in the ‘80s. By now, we were supposed to be starving from overpopulation and freezing from dried up oil reserves. Stock markets plunged again in 2000 and 2001. From 2000 to 2010, the S&P 500 lost almost 10%.
Yet despite all of those events, and many more, the value of the global economy (measured by gross domestic product or GDP) rose from $4.5 trillion in 1940 to almost $85 trillion in 2020. Over that same period, a globally diversified, 100% equity portfolio returned over 12% per year ($10,000 would have grown to $140 million, pre-tax).
However, a portfolio of just stocks would have suffered some frightening losses over the years. The worst would have a loss of about 50% in 2008. That’s why—even though the global economy has always grown—I encourage you to know your risk tolerance and invest appropriately to avoid panic during scary markets. Take my free, no obligation, no sales pitch RisQuiz at talkingrealmoney.com/risquiz and stop worrying about your wealth so that you can focus on your health.
The host of the nationally syndicated Don McDonald Show for over 20 years, Don now co-hosts Talking Real Money with Tom Cock on Seattle’s KOMO radio Saturdays at noon (TalkingRealMoney.com). Don also publishes the online magazine RealInvestingJournal.com.