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Avoid Portfolio Panic by Virus-Proofing It

the nyse as it appeared in late february reflecting the coronavirus scare
(Johannes Eisele/AFP via Getty Images)

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Tuesday, 25 February 2020 12:40 PM Current | Bio | Archive

So, is it over?

Is the longest-running bull market in history now at its end, given that scary thousand-point plunge in the Dow Jones stock index on Monday? Virus fears finally gripped a complacent Wall Street, knocking out all gains since the start of the new year.

That hurts.

The Dow had gained more than a thousand points from its close on Dec. 31, 2019 to a peak of 29551 on Feb. 12, 2020. Now we are back at the start.

It's always so much easier to destroy value than it is to build it. When a $100 stock plunges to 50 bucks, it loses 50% — and now the price must rise one hundred percent to get you back to even.

Stocks opened up briefly on Tuesday morning before heading down again.

My bet is they will regain that 3.5% loss, sooner rather than later, and will rise past a new milestone of Dow 30000 thereafter. I say this as a 401(k) investor who endured Black Monday in October 1987, the Tech Wreck in 2000, and the Great Meltdown of 2008, and as former anchor at CNBC who had a front-row seat for that last one.

The coronavirus, however, may be the lesser evil in terms of the markets.

The bigger one that cancels out all else is if Bernie Sanders were to win the election. In that event, stocks would crash and the markets would require years (and a one-term presidency) to recover.

Both of those black swans are difficult to track and predict. Someday a virus may become a pandemic and kill a million people, in a once-a-century crisis. When I was at The Wall Street Journal, I edited a story quoting viral experts as saying we were 20 years overdue for a big killer — and that story came out 20 years ago; so, now, we are 40 years overdue.

Still, there are some steps that investors can take to virus-proof their portfolios. Here are some worth considering:

  • Avoid the panic. The first step is to do nothing, for a while. This is especially true in your retirement account, and even truer still if you also have the benefit of youth. Few good investment decisions ever are made in haste.
  • Know that if you haven’t sold, you have avoided any loss, so far. Only when you turn fraidycat and sell at a depressed price do you lock in the losses. Hold off and let the price return to where it was, and you avoid any hit. Over the long term, stock prices do recover and continue to grow, at an average of 6% or 7% per year, over all, for the past century or more.
  • Figure out the risk in your portfolio and reduce it if necessary—something Wall Street advisors tend to neglect. Veteran Wall Street wealth advisor Ed Butowsky explains how to do this in the book we published last August: "Wealth Mismanagement: A Wall Street Insider on the Dirty Secrets of Financial Advisers and How to Protect Your Portfolio."

Assessing risk is based on the previous ten years of returns, and the maximum upside your portfolio has earned in a given year, compared with the maximum downside it has. This span is your account’s “standard deviation.” Rather than shooting for 30% annual gains at the risk of plunging 40% in any given year, you should shoot for, say, 10% gains at the risk of dropping only 5% or less, Butowsky says.

  • Make sure your account is diversified: that you have other kinds of assets that can rise in price when stocks plummet. Gold prices hit a seven-year high even as the Dow dropped a grand; government Treasurys surged up in price as a safe harbor.
  • For investors over age 60 who have enjoyed a decade of stock prices’ tripling, it may be time to start reducing some stock investments and moving the proceeds into non-correlated assets such as gold or real estate investment trusts. Slowly and gradually.

John Lekas of Leader Capital in Vancouver, Washomgton, is an avid virus tracker who runs a half-billion-dollar bond fund. A friend and client of mine, he tallies global numbers daily and computes chances for its spread or containment.

He worried long before Wall Street caught up to him.

Now, he says older investors should pare some stock holdings and put the money into double-A bonds, a safe place that will rise in price if the fear factor increases. In his blog, #LatestfromLekas, he argues that we can hit Dow 30000 by August — but only after stocks fall 10% or more before climbing back up. And he believes commodities will rise higher in price than stocks will rise in 2020.

Even at a time of crisis and rampant fear, somebody is making money somewhere.

Dennis Kneale is a writer and media strategist in New York. Previously he was an anchor at CNBC and at Fox Business Network, after serving as a senior editor at The Wall Street Journal and managing editor of Forbes. He helped write “Wealth Mismanagement: A Wall Street Insider on the Dirty Secrets of Financial Advisers and How to Protect Your Portfolio,” by Ed Butowsky, published in August 2019 by Post Hill Press. To read more of his reports — Click Here Now.

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Is the longest-running bull market in history now at its end, given that scary thousand-point plunge in the Dow Jones stock index on Monday?
bull, market, sanders, black monday
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2020-40-25
Tuesday, 25 February 2020 12:40 PM
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