It’s hard to believe one month ago the Dow Jones average hit a high of 29,551.42. Since then, we’ve experienced a US stock market meltdown and volatility similar to that of 2008. The Dow plummeted to 23,185.62 as of closing on Friday, March 13, a drop of 21.54%, crossing the official “bear market” boundary of 20%.

As a contrast, a well-diversified portfolio is down less than half that amount. So far many investors are taking the stock market drop in stride. I think there are four reasons.

1. Many investors rode their portfolios down 45% in 2008-2009 and saw them rebound and produce average real returns over the next 10 years.
2. Advisers have been telling investors to expect a downturn for a long time.
3. Most savvy investors learned from 2008 and now have reserve accounts where they hold 1-5 years of income in cash.
4. Those same savvy investors constructed their portfolios to cushion drops in equities by incorporating broad asset class diversification. For example, a 40/60 globally weighted portfolio, with 10% in REITS, has only 30% of stock market holdings in stocks, with 15% being US stocks. Around 60% of the portfolio is invested in other asset classes like bonds, TIPS, and cash equivalents.

If this downturn continues (and no one knows if it will), I suspect things may be more frightening than 2008. Why? Not only may we see a “normal” bear market, we are also dealing with fear of the COVID-19 virus, a potential recession, and uncertainty around the Presidential election.

I’ve been a financial adviser since 1983. I’ve seen four bear markets: 1980, 1987, 2000, and 2008. The average length of those bear markets was 18 months with an average decline of 41.7%. If this bear market is “average” (which would only be a coincidence) it could last 17 months and the Dow could fall a total of 12,322 points to bottom out at 17,228, around an additional 6,000-point drop.

So what is the best course of action? If you are scared, which is perfectly normal (many advisors are, too), acknowledge the fear—and leave your portfolio alone. I have never had a client hurt in the long term by staying with their portfolio. I have known a few investors who were financially hurt, some devastated, by jumping out too late and waiting too long to jump back in. For those few that insist on getting out, I always ask what will trigger them to get back in. The answer is always, “When things are better.” By the time “things are better,” the horse has left the gate.

If you absolutely MUST adjust your portfolio to sleep well at night, I would recommend reducing exposure to stocks. That could mean going from a 70/30 allocation to a 60/40 or a 50/50. Even though this is better than getting out, every investor I know who made such an adjustment in 2008 permanently took off 1-2% a year of annualized return. On a $1 million 60/40 portfolio, that small adjustment cost them $10,000 to $20,000 a year in lost income. If anything, this might be a time to increase equities in your portfolio.

The best action to take, as with any scary downturn, is to do nothing. Continue to rebalance your portfolio quarterly or annually.

Also, ignore talking heads proclaiming this downturn “is different” and markets will not rebound the same way as they did in the past. This happens with every downturn. If necessary, turn off or limit your consumption of financial news.

Finally, reach out to your financial adviser or financial therapist if you have questions, feel anxious, or are simply frightened. They are there to help.

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