What a difference a year makes. Last March, COVID appeared, and global commerce came to a halt. The Dow Jones fell more than 30% as investors reacted to the virus and economic shutdown. Initially, working from home was expected to last a few weeks before things returned to normal. Larry Kudlow, former director of the National Economic Council, said, “We have contained this. I won’t say it’s airtight, but it’s pretty close to airtight.” He added, “The outbreak is a human tragedy. It will likely not be an economic tragedy.”[1] Mr. Kudlow made these comments last February. COVID has been a human and economic tragedy. It killed more than 500,000 US citizens, and the financial death toll for restaurants, movie theaters, airlines, cruise ships, and thousands of small businesses is staggering.
The Dow Jones Industrial Average bottomed on March 23, 2020, as investors pivoted to working from home via Zoom, DocuSign, Adobe, Microsoft, Slack, Shopify, and Amazon. The virtual economic engine roared to life. How will companies adapt to a post-COVID world? I expect working from home and virtual meetings will be permanent fixtures for everyone.
One of the best things to happen during the pandemic has been the COVID vaccine. Moderna, Pfizer, and Johnson & Johnson received FDA approval for their vaccines, and according to NPR, 15% of the US population has received at least one dose, and 7.5% have received both. To date, more than 75 million doses have been administered.[2] The vaccine is allowing states to reopen – finally.
During the initial phases of COVID, investors were aggressive sellers of stocks, but it didn’t last long as people went bargain hunting. The buyers eventually won out, and the “bear market” was the shortest on record. Over the past year, the NASDAQ is up more than 56%, small-cap stocks climbed 47%, and international companies rose 21%. Bonds, however, sold off. Long-term bonds dropped 9.5%.
A natural reaction is to sell first and check the facts later, especially during a crisis. Panic selling occurs when investors don’t have a plan, or if they have one, they don’t follow it. A financial plan or investment policy statement can keep you in the market to achieve your goals. If structured properly, your plan allows for market shocks and corrections. A suitable plan ensures your assets are in line with your short and long-term goals. Your asset allocation should represent your risk tolerance. If you’re an aggressive investor, you’ll likely own more stocks than someone who is conservative. Regardless of your risk tolerance, allocating a portion of your account to cash or bonds is wise. Safe components allow you to ride out a storm or sell them to buy more stocks. Our bonds performed well last March when the market dropped. As it rebounded, we rebalanced our accounts to more aggressive investments.
As the world awakes from the COVID slumber, here are a few thoughts for your investment portfolio.
- Create a financial plan. Your plan allows you to focus on your goals while ignoring the short-term fluctuations in the market.
- Allocate a portion of your account to cash and bonds. Safe investments can help your portfolio when stocks fall, and they can be sold to buy stocks.
- Rebalance your accounts. The markets were extremely volatile last year. If you did nothing, your investments fluctuated between too conservative and too aggressive. Rebalancing allows your asset allocation and risk profile to remain intact.
- Invest for growth. Market corrections and pullbacks are normal, but stocks always recover. If your time horizon is three to five years or more, allocate a sizeable portion of your account to stocks.
My prayer is that we all get vaccinated to attend sporting events, go to movies, and eat in crowded restaurants. I believe we are close to experiencing life in a post-COVID world, and I look forward to it.
Be safe and happy investing.
“Don’t worry about the world coming to an end today. It’s already tomorrow in Australia.” — Charles Schulz
March 1, 2021
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.
[1] https://www.cnbc.com/2020/02/25/larry-kudlow-says-us-has-contained-the-coronavirus-and-the-economy-is-holding-up-nicely.html, by Fred Imbert, February 25, 2020
[2] https://www.npr.org/sections/health-shots/2021/01/28/960901166/how-is-the-covid-19-vaccination-campaign-going-in-your-state, March 1, 2021