Two weeks ago we saw a severe stock market decline, which was followed up with whipsaw volatility but a leveling off of prices overall last week. We are starting this week off with what appears to be somewhat of a panic by short-term market participants, with stock trading halted within minutes of opening Monday morning after a 7% drop (due to a exchange-imposed “circuit breaker” 15-minute trading halt - a rule in place, but never triggered, since 2013). As if the virus was not enough, now we have collapsing oil prices threatening the viability of an entire sector of the economy.
If this week is the first time during the coronavirus scare that stock prices meaningfully diverge from the underlying businesses they comprise (a 2,000 point drop in the Dow in a matter of minutes can do that), I would offer two actions investors should consider:
1) Don’t sell stocks simply to try and relieve the pain and prevent further paper losses in the near-term
While it is never reassuring to see stock prices diverge from corporate fundamentals and traditional company valuation metrics, selling securities when prices are irrational rarely pays off. In order for that bet to work, you need to be able to buy back the stock at lower prices (i.e. at even more irrational prices) in the future.
Not only is such a task extremely difficult when it is one’s main objective, but the very fact that somebody wanted to sell during a period of intense pain probably greatly reduces the odds the same investor would be able to buy back those shares after that pain has intensified.
The two smartest options during periods of near-term market dislocation/panic are to either buy mispriced securities with the intention of holding them for (at least) a year or two if needed, or wait things out until normalcy returns and any transaction you want to consider can be consummated at a fair price.
2) Strongly consider refinancing your mortgage
Mortgage rates have now hit all-time record lows, with the average 30-year fixed rate pushing towards 3.00%. I recommend getting a quote from your mortgage broker to see if the monthly savings from refinancing now is meaningful for you. To get judge the return on investment, I always try to see what mortgage rate I can get that offers a lender credit roughly equal to the closing costs. That way, the deal not only costs you close to nothing out of pocket (excluding the funding of an escrow account, if required by the lender), but also maximizes the ROI on the transaction.