As Coronavirus Swings The Stock Market, What's The Best Approach For Investors?
We’ve been hearing a lot about how to prevent and prepare for the health effects of the novel coronavirus, but what about the turbulence the virus is causing in the stock market? Vermont's Commissioner of Financial Regulation is urging investors not to overreact.
In a time like this, Commissioner Michael Pieciak said Vermonters should make investment decisions based on their long-term financial goals. He also said people should be on the lookout for possible investment scams.
Vermont's Commissioner of Financial Regulation spoke about with VPR's Henry Epp about the ongoing impacts of the coronavirus on the stock market. Their interview is below. It has been edited and condensed for clarity.
Henry Epp: So we've seen the Dow go through multiple days of thousand point losses and then gains at times over the last two weeks. Should investors be worried about this?
Michael Pieciak: Our advice is not to overreact. People really should not be thinking with their emotions. They should be thinking rationally and making decisions based on their time horizon for whatever it is they're investing for: A retirement, a house, saving up for school. And they should be thinking about those long term objectives and what their asset allocation is.
OK. We put out a call out to our listeners this week to tell us how they've been affected by the coronavirus. And we heard from at least two listeners who said that their retirement accounts have been significantly impacted. I'm curious what your advice would be for those who are close to retirement. Should they be pulling back from the stock market at a time like this?
So when you think about what is your long-term financial plan, what's your target allocation? There's sort of a rule of thumb in investing that you should take 100 and subtract that by your age, and that should generally be your allocation between equities or stocks and bonds or fixed income. So if you're a 30-year-old and you subtract that against 100, you get to 70-30, so 70% in stocks, 30% in fixed assets or bonds.
As you get closer to retirement, those allocations should change. So regardless of how the market is performing, as you're getting closer to your retirement, you should be thinking about, what's the appropriate asset allocation for yourself. You look at the stock market generally since the end of World War II, the stock market has increased in value by about 7% every year. So if you're in that longer-term horizon — even in retirement, you have decades potentially that you need your retirement money to work for you — you want to be thinking about having an allocation in the stock market, but you want to have that appropriate allocation. You don't want to be weighted too heavily in the stock market if you're thinking about retiring in the next year, year and a half, let's say.
At a time like this, there's also the possibility of investment scams. What are some ways that scammers might try to take advantage of people who might be a little bit more skittish about the volatility in the market?
You should be on the lookout for any investment that is provided to be zero-risk or have a guaranteed return. Investing, by its very definition, involves risk. There's no such thing as a zero-risk investment. Even the most safe investments in U.S. Treasuries and in other things, come with a certain degree of risk. Similarly, there's no such thing as a guaranteed return. So when people are trying to offer you a safer alternative, or a risk-free or a completely safe alternative, that really should be a red flag to investors that this might not be a legitimate investment.
And finally, outside of the stock market, but in the marketplace more generally, are you concerned at all about price-gouging for items that folks might be looking for at a time like this: Hand sanitizer, things that people are looking to stock up on?
Yes. I mean, you're always concerned about, you know, what's the impact to businesses when there is an event like this, and then ultimately, what is that impact to consumers? So when a business, for example, has its supply chain interrupted, it might not be able to get the type of products that consumers want or need. And that obviously could potentially lead to increases in pricing and price-gouging.
Obviously, the U.S. government and states have been pretty active and proactive in stopping clear instances of price-gouging. If there are issues related to that, certainly contacting the Vermont Attorney General's office or contacting our department … is something that I'd encourage Vermonters to do.