First, consumers should NOT beat themselves up because they lost money or substantial money in the stock market during the 2020 Corona Market Crash.
Many financial pundits have called this market crash a once in a lifetime crash due to the speed and the fact that it came out of nowhere.
The point of this post isn’t to give an “I told you so” commentary.
The point of this post is to see if we can all learn from this crash and make sure that when the next one comes, we’ll be better prepared.
The market is volatile and is likely to have significant corrections/crashes periodically.
We’ve all become a little spoiled with the stock market that has been on a good ride for over ten years. But for a pandemic that virtually no one saw coming, many figured the stock market would continue to rise steadily for the foreseeable future.
When you ignore the past and the pain of the past, it can lull you into a sense of complacency and comfort and that’s when you and your money can be most vulnerable.
Buying and holding can be painful.
Much of the investment planning advice given over the past decades has been to buy and hold based upon the idea that if you hold through the crash and can wait until it bounces back, you will get your money back and then some. While that may be true for some investors, the question is how long does it take to bounce back?
If you started with a $100,000 investment in a typical 60/40 mix of stocks to bonds on January 1, 2000 (just before the 2000 crash) and held through the 2007 crash, on March 1, 2009, you’d still have only $100,000 (over nine years of NO GAINS)!* And this example doesn’t take into account money management fees or taxes.
Many people can’t afford to wait years to get back to even and certainly most people wouldn’t want to.
1) Fixed Indexed Annuities (FIAs).
An FIA is a type of annuity that may have the following characteristics¹:
- No risk of loss due to market downturns.*
- Gains may be locked in annually protecting against market downturns,
- Many have guaranteed income for life riders
Why are FIAs not used more in the financial services industry? It depends on who you ask, but many advisors don’t like the fact that most FIAs have caps on the gains. That’s true and it’s not fun to get a 6% return, for example, when the stock market returns 15%+. But it sure may be beneficial to get a zero rate of return when the stock market goes negative 10%, 20%, 30% in any given year.
2) Tactical Money Management
While a Fixed Index Annuity can be a tool to use as you grow wealth for and in retirement, most people will also have money “in the market.” Instead of putting all that money in a buy/hold portfolio, it might make sense to seek out money managers who actively manage the portfolio to mitigate risk.
Most tactical money managers typically do not try to keep up with buy/hold benchmarks like the S&P 500 or even a typical 60/40 blend of stocks to bonds. Their goal is to limit the risk of their strategy to a certain drawdown (like no more than 10% or 15%). Because many tactical managers underperform in a steadily upmarket, people might find them boring.
Do you know who doesn’t find their investment strategies boring during the Corona Crash? Those who have money in well-managed tactical strategies.