The coronavirus pandemic has taken the financial markets on a rollercoaster ride through the first four months of 2020. In March, the S&P 500 fell 12.5%. Then in April, the S&P 500 rose 12.7% for its third-best month since WWII.2
Based on that math, one might assume that the S&P 500 had recouped its losses from March. After all, the index increased more in April than it fell in the previous month.
Unfortunately, that’s not the case. At the end of April, the S&P closed at 2912, still below its level of 3090 on March 2.3 Why is this the case? If April’s gains were greater than March’s decline, shouldn’t the market have recovered all of its losses? It has to do with the math behind market rebounds. Simply put, you have to gain more than you lost to get back to even.
Consider a portfolio worth $100,000 that loses 10% of its value. The portfolio is now down to $90,000 and needs gains of $10,000 to get back to even. But $10,000 isn’t 10% of $90,000; it’s 11.11%. That means you actually need a gain of 11.11% to recover from a 10% loss.
The greater the loss, the more you need to gain to get back to even:4
How Asset Allocation Impacts Your Recovery
Often after a market downturn, investors feel the urge to move to conservative asset classes that may offer less exposure to risk, but also limited growth potential. In some cases, this could be an appropriate adjustment, depending on one’s goals and risk tolerance. However, it’s also possible that such a move could mitigate your ability to recover from the downturn.
According to analysis from Putnam, one’s average annual return after a downturn impacts the length of their recovery. Assume you suffer a 20% loss, but then participate in a recovery with a 10% average annual return. You would get back to even in 2.25 years.5
Now assume that after losing 20%, you shift to “safe” assets that offer limited risk exposure, but also limited growth potential. You experience 2% average annual returns. At that rate, it would take more than 11 years to recover your losses.5
There’s no universal answer on how to proceed after a market downturn. It depends on your unique goals, needs, and concerns. However, it is worth exploring all your options before making a rushed decision, especially if your gut is to rush to safety.
Let’s talk about how to protect your assets and participate in a potential recovery. Contact me today at 480.659.2146 or [email protected]. I can help you analyze your needs and implement the best strategy for your objectives. Let’s connect soon and start the conversation.
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