Why is the Stock Market Rocketing Up During a Pandemic and Riots?

Q: I have a question about the stock market, and I trust you to give a straight answer. Why is the market rocketing up during a pandemic and riots? I panicked and pulled my money out of the market the day oil crashed (mid-April). Not because of the oil. I worry that things are being artificially inflated. This morning a friend said he already made his money back. I don’t understand how this makes sense. And it’s giving me anxiety. My ears have been ringing since he told me that – it must be from high blood pressure from feeling like I let the family down by losing our money. I only have 4 funds with Vanguard that I had money in: Large Cap Index, Target Retirement 2035, Total Stock Market and Vanguard 500 Index. I also had some money with a financial advisor and that account was handled through Charles Schwab. I directed him to also sell my holdings in that account. I'm in my mid-40s.

A: We’ve been through a highly stressful period. I hear your concerns, fears and confusion. And you should listen to your reaction to these recent events and pick your new investments accordingly. Allow me to explain.

The stock market always looks ahead and leads the economy. That’s why the drop was so violent in March because the coronavirus pandemic and the government mandated shutdowns caught us by surprise. So, we had medical concerns and economic concerns together.

Given the fact that the mandated shutdowns weren’t going to last more than a couple of months in most areas, the magnitude of the decline was overdone. Markets can overshoot to the upside and downside at times. You will note that the technology sector, which suffered the least from the shutdowns (some companies like Amazon, Netflix, Zoom Video, etc. actually benefitted), those stocks have bounced back the best compared to their highs earlier this year. Other industry groups like airlines, hotels, and other travel related stocks are still well below their highs earlier this year.

In speaking with you, it was very disappointing to hear that the financial advisor you were paying (through your Schwab account) made no effort to dissuade you from selling after the stock market’s large drop. A good advisor should have been through other downturns and be a voice of reason and provide an emotional buffer between you and kneejerk decisions and reactions to market turbulence and breaking news. In short, a good advisor should strongly encourage you to hold on and not bail after a major decline!

The four Vanguard funds you previously held are all solid funds but together don’t make for a well-diversified portfolio for you. You had a lot in U.S. stocks and in particular large company U.S. stocks.

Given the stress the volatility has caused you and for a better diversified portfolio, I think the Vanguard Target Retirement Funds could be your core holding(s). Each one holds a mix of four highly diversified index funds. The Target Retirement 2035 Fund you held had about 46 percent in the Total Stock Market Index fund and 30 percent in the Total International Stock Index Fund. 17 percent is invested in the Total Bond Market Index Fund and 7 percent in the Total International Bond Index Fund. You could also consider the Target Retirement 2040 or 2045 Funds as the overall allocation of those funds would be closer to what you actually had in your portfolio given the pure stock funds you previously held. As you may know, with all of these Vanguard Target Retirement Funds, as the years go by, the allocation of these funds gradually directs more into the bond funds from the stock funds (see graphic below).

If you wanted another fund at Vanguard to give you some exposure to their actively managed funds, check out the Vanguard Star fund which invests in 12 different funds and holds about 63 percent in stocks and 37 percent in bonds.

I suggest that you dump your financial advisor for the other money you invested through Schwab. You could add that money to your Vanguard holdings. Alternatively, you could consider Vanguard’s Personal Advisor Services, which charges an advisory fee of 0.30 percent to allocate your money across funds and help you manage them over time. I’m not saying that you need this service – just presenting it as an alternative to the advisor you had who failed to do his job.