The systemic shock of COVID-19 has interrupted every aspect of life and has left many investors feeling helpless. The pandemic and history-making market decline have engendered a broad sense of unknowability, something beyond our experience or understanding.
Eventually this will end and the long-term growth trend will resume, but no one knows when. Whenever the crisis is resolved, I believe that the emotional and psychological scars, rather than the financial aspects, will leave the most long-lasting residue.
Once fear is unleashed it follows a progressively ramped up pattern:
Over the past few weeks we have witnessed the progression from Fear to Dread and finally Panic throughout every segment of society. Even in the case of the financial markets, this progression happened much faster than at times in the past when we faced serious adversities. Never before has the broad stock market gone from an all-time high to a bear market so quickly.
All of us are human and fear is part of our factory wiring. It’s perfectly normal to feel fear in times like this; acting upon this fear, however, is something very different. Fear is inward-facing so it essentially feeds upon itself. That’s what makes it so potentially damaging.
Every crisis situation appears to be unprecedented as we are going through it. To wit, the October 19, 1987 market crash saw stock values fall more in percentage terms in a single day than ever before (more than 20%).
September 11, 2001 was a day where we experienced shock beyond anything we had ever witnessed before. The lives lost in that day exceeded Pearl Harbor six decades before which in itself was unprecedented.
A dozen years ago the financial crisis and Great Recession ushered in market chaos with stock prices falling almost 57% from October 2007- March 2009. That too, was unprecedented.
As goals-focused investors, we expect uncertainty. We understand that this uncertainty is why long-term stock market returns have produced well above inflation returns for many decades. The extreme uncertainty, however, from the combination of the market decline and the virus itself have challenged everything.
Financial planning goals create valuable space between you and your emotions. We know that markets have rewarded patience and discipline in the past; we expect that to be the case going forward.
Not headlines, not histrionics, but history. Start there.