When the herd is on the move, the natural instinct is to think, “Maybe I should be running with them.” But it’s hard to know if they’re headed for safety or over a cliff. The coronavirus outbreak has certainly had a historic and pronounced effect on markets, and the psychology of investors, but the length and severity of the current downturn is unclear. And that uncertainty is what underlies some of the market’s dramatic gyrations. As an advisor, you may have sponsors and participants who are worried that the COVID-19 pandemic will turn into a financial panic.
Here’s how you can help.
Your first instinct may be to reassure them that everything will be just fine. And history says you’d probably be right: In 10 of the last 12 serious disease outbreaks from 1981 to 2019, U.S. stock markets have rebounded with market gains over the next 6 to 12 months. The HIV/AIDS epidemic of 1981 saw the market fall 16.5% over the succeeding 12 months and the measles outbreak of 2014 saw subsequent losses of 0.7% a year later. Other serious outbreaks, however, have been followed by positive 12-month gains: The pneumonic plague outbreak of 1994 was followed by a gain of 26.3%; SARS (2003) 20.8%; bird flu (2006) 18.4%; dengue fever (2006) 14.3; H1N1 (Swine Flu) (2009) 36%; cholera (2010) 5.6%; MERS (2013) 18%; Ebola (2014) 10.4%; Zika (2016) 17.5%.
However, we don’t know that markets will react the same way this time — and neither do you — or your plan sponsors. So it’s important to refrain from offering blanket reassurance. This is also a good time to remind your clients that if they or their HR folks are being peppered with questions from pessimistic participants, they too should resist giving them financial advice that may or may not prove out in the market in the near future.
Individual situations differ, and the most prudent course for a 30-something with three decades before retirement may not be the same as a 60-something whose retirement is around the corner. Instead, encourage them to set up a one-on-one session with you or somebody from your team to help them analyze the effect of recent market developments on their long-term plan.
Health authorities are reminding us that to protect ourselves, the best things to do are the precautions we should already be taking such as washing our hands frequently, engaging in social distancing practices during an outbreak and trying to avoid obvious sources of germs. Now is the time to remind sponsors and participants to follow the same types of common, good-sense practices when it comes to protecting their financial health.
Prudent advice for most plan participants right now is to review their current portfolio and ask themselves these important questions:
- What are my long-term goals?
- What is my time-frame to retirement?
- What are my short-term and long-term risk tolerances?
- Is my asset allocation appropriate for my investment time horizon and risk tolerance?
While no one knows exactly what the course of the novel coronavirus or the markets will be, both can serve as important reminders of the types of things we should all be doing on a regular basis to safeguard both our financial and physical health.
