Naturally, traders have begun to sell stocks en masse on the bad news.
With the markets heavily down in such a short amount of time, it’s easy to get worried and panic. However, the long-term outlook remains strong. History shows that even events like the viral outbreak are often short-lived. For those choosing mutual funds to build their portfolios staying on the path could be a wise decision.
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A Growing Cause of Worry
The worst part is that the virus continues to spread. Global and national health organizations have now warned about it spreading into new territories. At the same time, various analysts and world economic groups – such as the IMF and OECD – have begun to ratchet down their expectations for global growth for the year. Investment bank Goldman Sachs even went as far as to say that U.S. companies will generate no earnings growth in 2020 because of the economic threats posed by the virus.
To that end, traders have begun panicking and selling stocks across the board. In a single week, the major averages witnessed their biggest weekly drop since the Great Depression and have now entered official correction territory by sinking more than 10% from recent highs.
For mutual fund investors checking their brokerage statements or logging onto their accounts, this hefty drop is a major cause for concern. According to Morningstar, some of the largest funds have sustained major losses. For example, *Vanguard Total Stock Market (VITSX) dipped more than 11.6% last week, while *Fidelity Value Fund (FDVLX) lost more than 13.4%.
The question is: What will come next and should we really be panicking about these losses in the long run?
Putting the Coronavirus Panic Into Perspective
Digging further into the panic, you can see how quickly the markets can recover from such events. According to Goldman Sachs, there have been 26 market corrections since World War II. Average market declines have been just 13.7%, and it took about four months to hit that point. However, they tend to rebound rather quickly. According to the data, they hit their prior highs in around four months as well.
Even if the markets turn bearish – a drop of 20% or more – they are still expected to rebound over the longer term. Again, according to Goldman Sachs, there have been 12 bear markets since World War II, and they have averaged a decline of 32.5%. However, within two years, they recovered and pushed through to new highs.
The point is that the markets can and do recover from terrible short-term stressors and corrections.
Stay the Course
The key to this long-term view is making sure you’re diversified and follow an allocation you feel comfortable with. For example, bond mutual funds have held up well over the last week. Morningstar notes that Vanguard Long-Term Treasury (VUSTX ) actually gained 4.9% during last week’s sell-off. This highlights the role bonds can play in a portfolio to reduce losses. If you’re sweating bullets over the recent losses in the market, there’s a good chance you’re taking too much risk with your portfolio. Adding more bond allocation or switching from high-growth stocks to more value/dividend-paying ones makes sense. And that can be done via mutual funds. Meanwhile, having some cash holdings to take advantage of opportunities or to provide a spending buffer makes plenty of sense for many investors.
In the end, there’s no reason to change course even for an event such as the coronavirus. The short term will be rocky, but looking forward, things should normalize.
The Bottom Line
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