Businesses need cash
Stock market investors know – or should know – that stock prices rise and fall rapidly. This is why most financial professionals recommend balancing the risk of your equity portfolio with bonds, a safe haven asset that generally gains in value as stocks fall. It was one of the most shocking features of Wednesday’s sale. As the Dow Jones fell sharply, many bonds, even rock-solid US Treasuries, also suffered losses. The yield on 10-year US Treasuries rose 0.096% to 1.178%. (Bond yields move in the opposite direction to that of prices.)
So what gives? Just like you, many large corporations are concerned that the US economy will shut down for a few weeks or even more. You would think this would cause investors to sell stocks and buy safe assets like Treasury bonds, which would push prices up. To some extent, this has happened in recent weeks. But on Wednesday, many investors seemed to face an even more pressing need. As the economy was about to come to a screeching halt, they needed money to pay employees, pay rent, meet other short-term obligations. They seem to have ended up selling even the safest assets that nevertheless risked locking their money up for months or years.
“For pension funds, it’s about selling whatever you can sell to build up reserves so that you can tell your administrators that you have enough money to pay pensions over the next nine or 10 months. “said hedge fund manager Sushil Wadhwani. The Wall Street Journal Wednesday, referencing some of the biggest players in the market.
Stay the course
So where does this take you? Riding a bear market is never fun. And that’s especially true when bonds – which are meant to be the foundation of your portfolio – start acting unpredictably. This does not mean that you should abandon your investment plan. Remember, you are focused on the long term. Even the most dire predictions about the coronavirus envision its economic impact as a short-term event, unfolding over weeks or months, not decades – where you should be focusing.
Of course, depending on your industry, it is possible that a coronavirus-related recession could cause you to lose your job or part of your income. If you haven’t followed the recommendation of financial planners to build up a cash reserve for up to six months of spending (and let’s face it, most of us are), it might be time. to sit down and try to figure out what you can make sure you have a short-term cushion big enough to pay your bills.
But when it comes to your 401 (k) or other stock market investments, try to remember that their value depends on what the US economy looks like in five, 10, or even more years, not over the years. next months.
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