How the COVID-19 pandemic alters the path of history remains to be seen. Like a retiree looking back over their life, it’s only in hindsight that they can fully process the impact of euphoric highs and devastating lows. The great events of history are similar; they shape people and societies.
As a CPP report pointed out1, those raised during the Great Depression were left with a “waste not, want not” attitude, while the kids of World War II grew up with a strong belief in hard work and stoicism. Those affected by the 2008 recession spend less, even now, and have a penchant for sales. How will the virus change our lives in the long term? How will it affect investor behaviour?
COVID-19 certainly raised awareness of the markets and personal finance. Job cuts, reduced hours and the raft of new government benefits had some people scrambling to survive, while the fortunate ones who kept full-time employment had to decide where to put their extra savings. In March 2021, the personal savings rate – total personal savings minus disposable income – surged to 26.6%, with pre-pandemic levels having been below 10%. For many, the importance of a long-term financial plan, which includes contingency for unexpected events, suddenly became crystal clear.
The pandemic exacerbated personal gains and losses, and the markets reflected this. Remember GameStop anybody? Its stock closed on August 31, 2022, at $28.64 after a roller coaster 52-week range of $19.40 to $63.92. And while some investors made a lot of money, others lost large amounts as GameStop plummeted $400 million from April 2021 to April 2022.
This get-rich-quick opportunity explains in part why more young people got into the equity market during the pandemic. Those in work, or those who collected benefits, had nowhere to spend their money. Lockdowns and health fears put a pause on travel and eating out, and there were fewer sporting events to bet on. The surge in meme stocks, therefore, caught the attention of the more speculative individuals. The stock market is different from an NFL accumulator, however, and many people learnt a brutal lesson in the difficulties of trying to time the market.
Awareness of the machinations of the market, even from the view of a DIY investor, is a good thing. But here’s the rub: being lured into the markets by the prospect of a huge windfall disregards the basic fundamentals of successful investing and is the anti-thesis of long-term retirement planning. An advisor can help you establish financial goals, invest for the long term and, if you want to invest in the “next big thing,” help you siphon off some “play” money that won’t sink your retirement.
Diversification is a central tenet of successful long-term investing. Ensuring your portfolio grows with minimum volatility and protection against market crashes is the holy grail for investors. But there is an argument that rebalancing within sectors is not given the importance it deserves and that hanging on to portfolio winners too long has become prevalent.
Take tech, for example, which spearheaded so much of the growth post-2008 and during the rebound from the COVID crash of March 2020. But 2022 has been sobering. According to a Reuters report, as of November 11, 2022, the Russell 1000 growth index is down 25% for the year, compared to a 16% decline for the S&P 500 and a 7% fall for the Dow Jones Industrial Average. Tech sector funds have been hit by a mass exodus, raising the prospect of the first year of outflows since 2016.
Hindsight reveals this selloff to have come too late. Individual names that some investors found hard to walk away from have been hit hard. Meta, the parent company of Facebook, fell 70% in 12 months, while Amazon’s share price has dropped 46% since January (as of November 9, 2022). For some, staying invested or even adding to your exposure makes sense. But many investors have failed to prepare for an era-defining shift.
We have entered a time of higher inflation and higher interest rates, and growth stocks (companies with the potential to outperform the market over time) suffered. Value stocks (companies considered to be undervalued by the market), meanwhile, are enjoying a resurgence. Throw in the fact that many tech firms have come off lockdown-driven highs, like Zoom for example, and portfolios were ripe for review. If these types of names had become an oversized portion of your portfolio, regular sector rebalancing would have lessened the blow of 2022. For many, it’s been a harsh lesson that what worked in the past doesn’t necessarily work in the future and that letting your portfolio drift can leave you less diversified and protected.
An advisor constantly assesses the markets, so your portfolio stays in line with your appetite for risk and time horizon. They help you prepare for whatever comes next.
As investors got hit hard by the pandemic, confidence in the market waned. Some people subsequently made the decision to move large parts of their portfolio into lower risk investments or even into cash, while others reacted by increasing the level of risk. According to Statista2, young investors acted more on external events than older generations. When the coronavirus pandemic hit in 2020, most investors from the oldest generation maintained the same risk profile, while the share of millennials who did so was lower.
In contrast to the GameStop narrative, or perhaps because of it, a recent study by the University of Missouri College, found that people, especially the young, fundamentally moved away from taking financial risks during the pandemic. This may ease the nerves but ironically, it is riskier. If someone’s risk tolerance is lowered, their portfolio could lose value over time, increasing the likelihood they fail to reach their retirement goals.
Will there be long-term financial scar tissue from the pandemic? Time will tell but getting out of riskier investments all together means you’ll miss out on the full benefits of the economic recovery whenever that comes (and history tells us it will come). The damage of the pandemic is still fresh and real, but a skilled advisor can help you, whether you are 25 or 68 years old, declutter your mind from recent events and focus on what your money is really for and the best strategy to get there.
CMT, CFTe, CIM, FCSI
Financial & Estate Planning Advisor