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Alpha Wealth Management & Planning, LLC

Short Term Volatility: What's Your Move?

The financial markets don’t like bad news. The current coronavirus outbreak is no exception, and many investors are tempted once more to “do something.”

But in times of volatile markets, the best move of all for long-term investors is often no move at all. While they’re not exact parallels, the stock market responses to the SARS coronavirus in 2003 and the Zika virus in 2016 offer useful lessons. In both cases, investors who sold on bad news and falling prices missed significant rebounds that very shortly had stock markets back to prior levels.

There’s no guarantee that today’s market will play out the same way; stocks have also taken days, months or longer to regain losses. But remember that knowing when to get back in is just as hard as knowing when to get out. The investment strategy I’ve mapped out for you is a long-term plan based on your personal goals and circumstances. Should those change, let’s talk about whether an adjustment to your strategy is warranted.

A health crisis downturn doesn't last forever

On the left is a representation of U.S. stock and bond markets in 2003, when SARS fears contributed to a sell-off by investors. On the right is a representation of U.S. stock and bond markets in 2016, when investors worried about the economic impact of the Zika virus, prompting a sell-off. In both the SARS and the Zika scenarios, a hypothetical portfolio of $1 million fared significantly better if it were left alone as 100% stock holdings, than if it were converted to all bonds at the troughs of each decline.

Source: Vanguard calculations, based on data from FactSet.

Notes: U.S. stocks are represented by the S&P 500 Index. U.S. bonds are represented by the Bloomberg Barclays U.S. Aggregate Bond Index through December 31, 2009; Bloomberg Barclays U.S. Aggregate Float Adjusted Index thereafter.

The performance of an index is not an exact representation of any particular investment, as you cannot directly invest in an index