Fear Drives Stocks Into Correction Territory

There is an old market saying: Stocks take the stairs going up and take the elevator down.

That was evident last week as the Dow Jones Industrial Average collapsed as much as 12.4%, falling into so-called correction territory (declines of 10% or more).  The eye-popping stock selling marked the worse week since the 2008 Global Financial Crisis. Apple and Microsoft lost a combined $300 billion.

The coronavirus has now spread to 60 countries around the globe. Economists highlighted concerns about how quarantined towns reduce economic activity and global growth forecasts have been downgraded to 2.4% from closer to 3% in 2020. But, if the coronavirus officially becomes a global pandemic, economists warn the economic impact could be much worse with the potential for the U.S. to fall into a recession.

If you were rattled by the shockingly massive losses on Wall Street last week, you aren’t alone.

No one likes to see the account balance on their 401k or investment accounts fall by 10% in a week.

Successful investing involves a thoughtful diversification plan that is uniquely tailored to your risk tolerance level and takes into account your time horizon (when do you want to use the money) and your long-term financial goals.

If you became fearful last week, it could be a sign that you don’t have proper asset allocation in place for your portfolio.

One of the key benefits of portfolio diversification is the choice to own non-correlated assets. That simply means when one asset goes down (stocks for example), another asset goes up (gold for example).

The Dow Jones Industrial Average closed last week 10.96% lower for the year. After climbing to a new 7-year high, gold gave back a portion of its gains finishing last week about 3% higher for the year.  That is what non-correlated assets means. Stocks down 10.96% and gold up 3%.

Investors who held a portion of their portfolio allocated to tangible assets like gold lock in better long-term return with less volatility during stock market declines.

Gold has what is known as a “low beta.”

From 1987-2019, a stern test, which included the 1987 and 1989 stock market crashes, the dot.com collapse, 9/11 and the subsequent recession and the 2008 Global financial crisis found that the volatility of returns on gold relative to the stock market was relatively low. The 4.9% average annual return on gold means that investors would have reduced the volatility of typical portfolios without sacrificing returns, according to a February 2020 study by Penn State University’s RL Associates.

If last week’s volatility was too much for you, it could mean your portfolio isn’t properly diversified. It’s not too late to adjust your allocation to allow you to successfully manage volatility going forward. If you’d like personalized recommendations, call a Blanchard portfolio manager at 1-800-880-4653 today.

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