When the market goes down, it's important to understand what has happened. Short-term reactions to political conditions and even a potential multi-month drag on the economy by a public health scare like coronavirus should not change your long-term outlook.
When you examine your portfolio and money you have sitting on the sideline, it's important to take a rational approach. Look at every stock you own and the few you're looking at buying, and apply the following questions to each one.
A market sell-off can be an opportunity. Image source: Getty Images.
1. Has the strength of this company changed?
It's possible that an economic change could affect a company longer than the current sell-off. A prolonged recession, for example, might hurt companies that sell luxury items.
In the current case, coronavirus may stop people from going to Starbucks and that may cause a quarter or two of poor results. There's no reason to believe, however, that the chain's audience won't come back once it's safe to leave the house.
2. Can I buy companies I like at a discount?
If you fundamentally believe in a brand, then a sell-off lets you buy shares at a discount. To put that in non-stock terms, I wear the same black polo shirt nearly every day. If the retailer I buy that shirt at (J.C. Penney) puts that shirt on sale at half the normal price, I'm going to buy a bunch of them.
When it comes to shares of stock, the price does not set the value as it might for, say, rare sneakers or cooler clothes than what I wear. A stock retains its worth even if its price goes down, and when conditions return to normal the share price will recover.
3. Did the current situation open eyes to a well-run company?
Coronavirus may put attention on a number of companies that facilitate remote work and communication (Teladoc). Many of these companies are getting a lot of extra attention because the coronavirus has forced more people to work from home and made others not want to go sit in a doctor's office.
In many cases, the benefits of these companies will remain after the current situation passes. It's easier, for example, to have a meeting over Slack than it is to take a plane to meet in person. In fact, it might be easier to meet using technology than it is for everyone in the same office to walk to a conference room.
4. What is my time horizon?
Someone investing at 25 has different needs than someone who's 63 and sees retirement relatively close at hand. Good companies recover from market sell-off, but that recovery can take time.
If you have a long-term threshold (decades) then buy the best companies you can because you can wait for them to recover. If you're looking at years, not decades, you might consider investing in solid brands that either will likely recover quickly or ones that weathered the sell-off well.
Don't panic
Nobody likes watching the market drop by 1,000 points or more. It's scary and fear can make people do irrational things.
Remember that historically the stock market has periodic sell-offs, and it has always recovered and then gotten even bigger. That pattern will probably repeat numerous times during your long investing life. Take the long-term view and make portfolio adjustments based on the companies, not market conditions.
