I’m sitting here in my den, pondering the events of last week and the foreshadowed events yet to come. The stock market crash of 2020 has apparently settled in and doesn’t appear to be leaving us any time soon. Why did this happen? How long will it last? And perhaps most importantly, what should we do about it?
The Stock Marketing Crash of 2020 – What Should You Do?
This post is my personal reflection on the market and the actions that should be taken. Before taking any action yourself, please consult with a professional that you know and trust.
As I write this, it’s Friday morning, 2/28/2020. So far, the market (as signified by the Dow Jones Industrial Average, DJI) is down 3,581 points from just one week ago Thursday when it was holding strong at 29,348. That’s a drop of 12.2%…in a week. And, as of now, the futures on Friday look to be down sharply as well — starting down another 300 points (Update: as it turns out, this is actually where they ended on Friday — down 300).
What Happened? Why Is The Stock Marketing Tanking?
If this truly is the stock market crash of 2020…why is it? How did it come to be?
According to MarketWatch, there are 5 reasons for the recent (and ongoing) dip in the market:
- COVID-19 – the coronavirus – it’s spreading and fears are escalating. This is causing quarantines and corporate shutdowns…and is certainly impacting the economy.
- The 2020 Election – Socialism is gaining traction and capitalism may soon take a backseat. This has historically slowed economies in the past and might mean future economic restraint…
- Lofty Valuations – The market has been riding high for over a decade and the values have simply outpaced the actual economic performance.
- The Bond Market – Government bond yields have been sliding as more and more people are looking to stash their money there, instead of in the volatile stock market of today.
- Recession Fears – People have been waiting for a recession for a while. Fears are increasing. Therefore, when a blip happens in the market, investors are quick to pull their money out of the market…which of course causes it to tumble further.
Are The Fears Valid?
In my opinion, the majority of the sell-off happened solely because of the coronavirus scare. It has killed thousands of people and yeah…it’s scary. We don’t have a vaccine, there’s no quick cure, and the virus seems to keep spreading regardless of all the attention it’s getting.
However, here’s a recent quote by Health.com:
‘So overall, which is worse: coronavirus or flu?
That’s not really an easy question to answer, says Dr. Brown. “It depends on what you mean by worse,” he says. “More easily spread? Then it appears to be coronavirus. Causes more cases of serious illness? Then it’s flu.”’
So yes, the coronavirus is spreading fast, but is it really all that severe? Apparently not. It seems to just be the latest thing that the media has grabbed onto and is giving them great ratings…therefore they’ll continue to report on it.
Beyond this, yes the stock market seemed to be a little over-valued, so we all expected a bit of a correction, but probably not THIS BIG. In my opinion, the continued tanking of the stock market was driven by fears of the stock market going down. Then, when the market did actually start going down, people said, “Oh crap, this is it! I’m pulling my money out!” Which then of course drives the market down even further.
Is the entire 12% reduction in the stock market valid this past week? You know…I’m no expert, but I’d personally say no. Sure, the stocks should have come down some because of the overvaluation, but the sell-off this past week was unprecedented. The fears, the political tensions, the hypersensitivity of the market — all these factors lead to a quicker than usual dive, and perhaps one that was deeper than necessary.
How Long Will This Recession Last?
When can we expect to see the Dow up at 29,000 points again? Will this happen sometime this next week? Maybe the week after?
With the other recent corrections (January 2018 and September 2018), it has taken approximately 9 months for the market to come back to the previous highs. However, that was when the market corrected purely because of over-valuation. This time, there are more variables at play…
As we stated before, there were multiple reasons for the market decline this time. For this reason, the correction was quick, and in my opinion, why it will take longer to recover than in prior years.
- The coronavirus
- The election
- The bond market
- Recession fears
Based on the reasons outlines above, the market may actually continue to go down (after all, analysts predicted a paltry 2020 even before this recent correction). And, with a new president (or, the existing president) not taking office for another 9 months, it could be years before we see the Dow inching toward that 30,000 mark again.
What Should You Do About It?
The market is down pretty severely…and the correction may not be over. What should you do now?
- Sell while you can?
- Buy up a bunch?
As I stated in the beginning of this post, I’m not a certified financial planner. I am also not a professional market analyst. This post is simply my take on what I see happening and my gut for what might happen in the future. If you want to move your money around, take the advice of professionals that know your exact situation. This is simply a ‘What would Derek do?’ for a couple of generalized situations.
If you’re not yet retired
I’m 34 years old.
- I have a solid job with a great company.
- My 401k was nearing $170,000. Now it’s at $150,000.
- I have a 6 month emergency fund of $20,000
What should I do in this market correction? Should I try to buy more shares of the market to maximize my gains?
Many would say, “yes”, but based on the situation I’ve outlined above (my own), I would say no.
The only money I have to invest would be my emergency fund, and with the market downturn, there may be layoffs in the future. That emergency money is there for an emergency (novel thought…right? :)). And, with the uncertainty in the market, a monetary emergency becomes more likely.
Hold onto that emergency fund money.
As for investing, I plan to just continue stashing cash into the market every paycheck like I’ve already been doing for years.
- I’m covered in the event of an emergency
- Stocks are cheap right now, so I may as well continue buying
- The market might continue to go down, so there’s no sense in making huge purchases with that massive unknown.
Beyond this, I’m more interested in buying up some rental property in the future. If the housing market takes a tumble, the bottom of that market will lag behind the stock market (much like it did from 2009 to 2012), which makes buying opportunities easier to identify. If you’re interested in building wealth with real estate, you might just want to hold tight and save up your cash.
If you’re in your late retirement years
What if you’re older? What if you depend on your investments to yield you yearly returns that you can then live off of?
There’s no easy solution for this situation. But, you need to make sure you look both at the short term and the long term.
- If you pull money out now, you’re taking huge losses and the remaining funds may be too small to last for the rest of your life
- If you leave the money in, the funds may continue to go down and make your nest egg even smaller, causing your losses to mount…
Like I said, the solution isn’t easy. You’ll need to do what you can to make the funds last until you die (which of course, nobody really knows the date…I just plan on 100 years old ;)). In addition to deciding whether you should pull money out of the market or not, you’ll probably also have to decide how to live on less, or how to earn some money elsewhere.
- Dial back your expenses
- Find a part-time job to float you through the tough times
- Maybe you should even consider selling your home while the real estate market is still hot
Sure, it would be nice if the market just kept shooting up and made those retirement years super easy and carefree, but that’s apparently not happening. So, it’s time to make those tough calls. For me though, I’d do my absolute best to leave all my money in the market. It’s proven time and time again that it will come back – and come back to even greater heights than before.
The Stock Market Crash of 2020 – What Now? What Are You Doing?
Nobody knows what’s ultimately going to happen in the market today, tomorrow, and certainly not years from now. What we have to go on though, is history. And history will tell us not to hop in and out of the market.
Chris Hogan, a well-known Dave Ramsey personality, says this:
“When you start investing, you have to be emotionally prepared for it to go up and down—sometimes dramatically. If you’re not prepared for that, you’ll make one of the biggest mistakes when it comes to investing: jumping out at the wrong time.”
I wholeheartedly agree. I’m staying in the market. I’ll continue to invest. And you know what? My ‘used-to-be-$170,000 turned $150,000’ will likely be $200,000+ a few years from now. I absolutely believe it, and it’s why I’m going to continue chunking money into the stock market via my 401k investments.
How about you? Are you buying at this point? Are you holding? Are you taking money out? Why or why not??
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.