By: Matt Lengel
I’ll never forget walking into the office on March 16th, 2020. The stock market was opening that day down 7% after finishing the day before down close to 13%. The Dow Jones had already fallen 10% on the 12th and, like many of my clients, I was just starting to understand the impact the pandemic would have on our health, our emotional well-being, and our economy.
It’s a little surreal to look back on that time now. My wife and I started making a “video diary” in March of 2020 that we recently watched; we both agreed back then there was no way this pandemic would last until May. We had no idea how wrong we could be.
Like many of you, we have acutely felt the uncertainty of 2020 and are doing everything we can to feel more in control in our own lives. As we’ve reached out to other professionals to get our questions answered it’s made me think about the questions my own clients might have about what’s going on, especially with so many conflicting reports in the news. So, let’s talk about it.
My investment accounts are up. Why are people saying the economy isn’t doing well?
Let’s start with the difference between the stock market and the economy – because there is a difference.
The stock market is based off large companies with long track records who have access to many different ways of acquiring more money from investors for business operations. This makes them hypothetically, more stable since they have more ways of “staying afloat” through things such as bond offerings, selling of stock, etc.
In contrast, while companies such as Google, Amazon, and JP Morgan are publicly traded businesses, there is a huge swath of small businesses such as your local Mom and Pop store, local restaurants, etc. that help drive the economy but aren’t large enough to be publicly traded businesses.
While the stock market is based off investing in these larger, more mature companies, the economy is based on the overall aggregate of consumers and business’ health. Because there are many more small businesses that aren’t publicly traded than there are large, mature publicly traded companies, it’s easy to get confused and assume the stock market is the economy. However, the economy doesn’t “trade daily” and there’s no ticker symbol attached to the economy. It depends on factors such as how many small businesses are thriving and how many people have jobs (just to name a few) while the stock market is focused on if Amazon had a good quarter or not.
Back to our original question. When someone inquires as to why their account is up while the economy seems to be struggling, I ask them this: Do you know what you’re invested in? A lot of people see “investing” and the “stock market” as these black and white options. However, it’s simply not the case. Some parts of the stock market have recovered and are actually positive for the year – particularly large cap growth stocks. However, the Russell 2000 Value index which represents smaller companies and is probably more indicative of “Main Street” is down 16% YTD as of October 16th, 2020.
All of this uncertainty is making me anxious. Should I consider selling?
I think this goes back to my previous point of not viewing investing as “all in” or “all out” but approaching it with shades of gray. If you’re worried about your investments, work with a professional who can “de-risk” your portfolio rather than sell everything to cash. As a reminder, moving everything to cash doesn’t mean you have no risk. In fact, it just ensures death by a thousand cuts: every year, inflation will eat away at more and more of your cash.
It’s more important to align your investing strategy with the time horizon of the goals you’d like to achieve. If you don’t plan on retiring for 20 more years, then 2020 is simply a blip on the radar. Don’t get so focused on the trees that you lose sight of the forest.
Are stocks a reliable gauge of the health of the economy?
Stocks sit on top of the economy, they’re not necessarily a reliable gauge of how the economy is doing — especially in the short term.
As a reminder, investing in publicly traded companies (the stock market) means the company is a mature, seasoned company with many different ways of raising capital available to them. Your favorite restaurant, hair salon, or local auto body shop have nothing to do with the stock market. Just because mature companies are appreciating in value doesn’t mean that small businesses aren’t suffering and vice versa.
We’re all in the same boat
Everyone has felt some sort of insecurity during 2020 – so much in our lives has changed that it would be almost impossible not to feel the effects. It’s important to keep in mind that during times of uncertainty, finding things you can control – such as your cash flow, taxes, and working toward your future goals – can give you the peace of mind you’re seeking.
And working with a professional can help with that as well. At Denver Private Wealth Management, we work with clients to ensure they’re seeing the whole picture of their financial lives, not just the movements of the stock market. Feel free to reach out so we can help frame your financial life in a way that makes you feel more in control of where you’re headed and how you’ll get there.
Denver Private Wealth Management is an independent fee-based financial planning practice with 80+ years of experience in the financial industry. DPWM customizes portfolios based on your financial goals and works closely with you, your tax advisors and estate attorneys to form a comprehensive view of your financial situation. For more information or to set up a free consultation, contact us at email@example.com.
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