Stocks fell for a third day Wednesday on coronavirus fears — 5 questions to ask your financial adviser right now

Stock markets fell for third consecutive day Wednesday, following alarming news over the weekend that the coronavirus had spread much further than originally thought.

Meanwhile, Treasury bonds TMUBMUSD10Y, -1.07%, Swiss francs FXF, -0.02%, and gold GLD, +0.44% — assets that generally attract investor interest in times of turmoil — rose.

Warren Buffett on Monday urged investors not to overreact. But if the coronavirus has you worrying about all the stock funds in your investment portfolio, financial professionals say the problem may not be the coronavirus.

It may be all the stock funds in your investment portfolio.

“This is a great time to re-evaluate your true risk tolerance, which I don’t think can be gauged via software, and determine if you are taking on the right amount of risk for your portfolio,” says Jonathan Bednar, a financial planner with Paradigm Wealth Partners in Knoxville, Tenn.

“If you are nervous then you may be taking on more risk than you are really comfortable with and should rebalance into a more conservative portfolio,” he said.

5 questions to ask your broker or financial adviser:

1. Are you taking on too much stock-market risk?

2. How would you react if the market kept falling?

3. Are you sensibly diversified?

4. Are your investments appropriate for your age?

5. Do your investments fit with your long-term financial goals?

“Today is a great litmus test,” added Nick Hofer of Boston Family Advisors. Monday’s selloff, he added, “highlights the importance of knowing your willingness to take risk.”

Financial experts generally recommend owning fewer stocks as you get older, because you will have less time in which to recover from a long sell-off.

Many investors may have grown complacent after 10 years during which the S&P 500 SPX, -0.38% has more than tripled in value and some of their favorite stocks — such as Apple AAPL, +1.59% and Netflix NFLX, +5.32% — have been star performers.

Fidelity Investments, a major manager of company retirement plans, recently estimated that 23% of the investors in the 401(k) plans it manages were overinvested in stocks compared to their recommended levels, including 7% who had their entire 401(k) plan in the stock market. Among baby boomers, who are near or in retirement, 38% were overinvested in stocks, and 8% were entirely invested in the stock market.

For longer-term investors, the kind who don’t trade in and out of the market, the current sell-off is a reminder that stocks can go down as well as up, and not just for brief dips or panics.

From the highs to the lows of the bear markets of 2000 to 2002 and 2007 to 2009, investors in the S&P 500 suffered losses of about 45%, even counting dividends.

And studies have repeatedly shown that when that occurs, many ordinary investors eventually find the losses too much to bear and sell stocks, often at or around the market lows.

It is more rational than it may seem. The risk for investors in a crash is that it gets a lot worse before it gets better, as it did in the U.S. in 1929-1933 and in Japan after 1989. Someone who has lost half the value of their retirement fund cannot afford to lose any more, especially if they are close to retirement and may be unable to keep working.

Meanwhile, those who own Treasury bonds have fared much better during bear markets. Treasuries, which provide steady income no matter what, tend to go up in turmoil when stocks go down.

For example, the basic Vanguard Balanced Index FundVBIAX, -0.38%, which is 60% invested in stocks and 40% in bonds, lost about 23% and 35%, during the turmoil of 2000-2002 and 2007-2009.

There are many theories about how to construct an “all-weather” portfolio that can protect against turmoil. They can include bonds, gold and other assets.

The theories change, as markets and economies do. Long-term Treasury bonds, safe havens in past bear markets, offer far lower yields than they did in the past and, therefore, offer less protection in future market downturns than they have done previously.

But all mainstream theories of all-weather investing have one thing in common: avoid an overreliance on stocks, something that people often forget after the market has risen a long way, and often remember too late.

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