Did you know today is Ash Wednesday and that yesterday was Mardi Gras day, the end of carnival season? If not then you definitely not live in New Orleans like I do. While our streets were filled with floats, plastic beads, costumes, glitter, and revelry for the sixth and seventh day in a row, the stock market was taking a serious plunge. It dropped more than 3% on Monday (which we call Lundi Gras) and another 3% on Mardi Gras day, the final day of Carnival. This Ash Wednesday feels even more gloomy than usual.
I am calling this The Great Mardi Gras Selloff of 2020.
Next year, do you think you will remember the Lundi Gras / Coronavirus selloff of 2020?
— Blair H duQuesnay (@BlairHduQuesnay) February 24, 2020
Markets should be closed on Mardi Gras day.
— Blair H duQuesnay (@BlairHduQuesnay) February 25, 2020
While the market drops by 3% or more about four times a year on average, drops of 6% or more in two days are less frequent.
Since 1950 there have been 34 instances where the S&P 500 was down by more than 6% over its prior two sessions. Considering that there are 17,655 two-day trading sessions over this time period, we have only seen trading activity this severe (or worse) on 0.2% of all trading days, or once every 2 years, on average. – Nick Maggiulli, Of Dollars and Data
Being a little bit scared, or at least spooked, by this quick drop in the market would not be unusual. We are in rarified territory – something that happens less than 0.2% of the time. Yet for those of us that are long-term investors, rather than speculators trading by the seat of our pants – we knew this was going to happen. We didn’t know when, or why, or how, but we expect selloffs, corrections, and bear markets. These are normal, necessary, and dare I say, healthy, characteristics of the stock market.
In science, laws are observed phenomena. An example in physics is that there exists the force of gravity between particles. In investing, one such universal law is that the investor must take risk to earn a reward. That being said – without market downturns, there is no risk; and without risk, no reward.
Every financial blogger has at some point written a post called – The Price of Admission – myself included. But that is exactly what market declines are, a necessary price we must pay to earn market returns.
Where do we go from here? I have a Magic 8 Ball on my desk you can consult.
What should you do about it? I like to follow what I call ‘the bird in the hand’ theory.
If you’ve been sitting on cash, waiting to invest, here’s your chance. Don’t miss it!
If you are working and saving a portion of every paycheck, awesome. You get to invest at a slightly lower price than last month. This is perfect timing for a selloff if you just received a year-end bonus.
If you are retired, don’t sweat it. Hopefully you own a diversified mix of stocks and bonds. (If not, it might be time to hire an advisor) If this selloff turns into a correction or a bear market, you will have a chance to rebalance to buy stocks at a lower price. This will set you up for a nice recovery when the market turns positive again.
AND IF this is coronavirus armageddon with looming imminent death – you didn’t need the money anyway. So “Laissez les Bon Temps Roulez,” open the finest bottle of wine in your collection and enjoy it while you can! Of course I say this tongue in cheek because I don’t expect this in the end of days.
This is the beauty of long-term investing.
There is something positive you can do in every market situation. A carefully constructed financial plan includes the expectation of inevitable market downturns. The challenge is preparing ourselves mentally as well as physically because the next one is always coming.
Riding in the 2020 Krewe of Iris parade on Saturday. It was a gorgeous day for a parade.
