Markets and Economy Four years later: The portfolio decision I’m glad I didn’t make

It’s been four years since the world shut down because of the coronavirus outbreak. The events of those first weeks of the shutdown still haunt me. I can vividly remember walking through an empty Times Square for what would be my last in-person CNBC Squawk Box appearance for a long while, feeling as if I were the last person on Earth. By the time I returned home, our local Board of Education had closed the schools, activities were canceled, and my wife was cleaning the groceries with disinfecting wipes and putting the mail in the oven. To call it surreal would be an understatement.

The rapidly spreading pandemic and the increasingly overwhelmed healthcare system had me panicked, but also feeling ill-equipped to do anything. Instead, with the family safe at home and my action bias raging, I turned my attention to my investment portfolio. Managing my investments was something I felt equipped to do, or so I hoped.

Fighting the urge to sell

It had only been weeks earlier that the S&P 500 Index had hit an all-time high.¹ Now, the market was down 20%, with no bottom in sight.² I had lived through recessions, financial crises, terror attacks, oil shocks, war and much more, but this felt different. A global pandemic? My professors had not covered pandemics in my economic and finance courses, and I had not taken biology since I was 15 years old. Every part of my being knew that I could not liquidate my portfolio, but my emotions kept driving me towards the sell button. If there was to be no economic activity, then there would be no earnings. How does one comfortably invest in a market of companies that will not be generating earnings?

Ironically, I had spent much of my career imploring investors to manage their emotions. I, as much as anyone, knew that breaking from investment plans at inopportune times had typically cost investors dearly. I promised myself I would not make that same mistake. However, by the time the market was down 35% on March 23,³ it had shot my nerves. I wanted out. One-third of everything I had worked for was gone in weeks. What is worse is that the pandemic had me plagued (no pun intended) by the feeling that conditions had to get significantly worse before they got better.

Staying the course

I called a former colleague and long-time friend to ask what he was doing with his portfolio. He calmly responded, “Nothing.” He then told me that he would be buying more equities soon. My friend reminded me of what I had already known. Of all the factors involved in investing, time is the most important. I owe him one. He knows who he is.

By late March, the Trump administration had passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the US Federal Reserve had committed to “using their full range of tools to support the US economy.” The National Institutes of Health announced a phase 1 trial of a messenger ribonucleic acid vaccine designed to protect against coronavirus disease 2019. It dawned on me that betting against the US economy and the US equity markets was akin to betting against the policymakers, human ingenuity, and scientific advancement. I was not willing to make that bet, nor will I ever be.

What could selling cost in the long run?

The decisions I made over those fateful (and horrifying) two weeks may be the difference in whether I reach my investment goals. Here are hypothetical numbers to prove that point:

Considerations: An individual starting their career in 1998, maximizing investments each year in their 401(k) ranging from $10,000 in 1998 to $22,500 in 2023,⁴ with all investments in the S&P 500 Index. Based on those numbers, this hypothetical individual would have had their 401(k)-balance fall from a high of $996,630 on Feb. 19, 2020, to $732,500 on March 13, 2020.⁵

The charts below analyze three choices this investor could have made in this situation:

• Switch to cash and stay there. If on that date, the individual had sold everything and transferred the balance to cash, then the current balance would be $875,801, or 9.3% below the pre-COVID high.⁵
• Switch to cash then reallocate to equities. If instead the individual had stayed out of the market for the remainder of 2020 and all of 2021, only to restore their full equity position in 2022, the current balance would be $907,639, or 6.1% below the pre-COVID high.⁵
• Remain invested. If the individual had remained invested throughout the entire period, their current balance would be over $1.7 million, or 1.7 times the balance on Feb. 19, 2020.⁵

So much of what transpired four years ago still upsets me. But from an investment perspective, I’m haunted by the idea of what could have happened if I had given into my fears and sold everything. Fortunately I didn’t do so.