The term “coronavirus” is so new, some people have apparently wondered whether it is related to Corona beer (it is not; it’s named after its crown-shaped particles). And yet, how quickly it has grabbed global headlines.
As the viral news has spread, so too has financial uncertainty. What’s going to happen next? Will it further infect our domestic or global economies? In case it does, should you try to shift your investments to remain one step ahead?
My advice is simple: do try to avoid this or any other health risk through good hygiene. Wash your hands. Cover your mouth when you cough. Eat well, exercise, and get plenty of sleep. If the outbreak worsens and the CDC advises, avoid large gatherings of people, unnecessary travel, and schedule virtual meetings and telecommute if possible.
But do not let the breaking news (this or any other) directly impact your investing strategy discipline.
If you are already following an evidence-based investment strategy:
- You already have a globally diversified investment portfolio that includes some low to moderate risk asset classes such as bonds and cash to dampen volatility.
- It’s already structured to capture a measure of the market’s expected long-term returns.
- You’ve already accepted that tolerating a measure of this sort of risk is essential if you’d like to actually earn those expected long-term returns.
- You’ve already identified how much market risk you must expect to endure to achieve your personal financial goals; you have allocated your investments accordingly.
In other words, it may feel counterintuitive, but leaving your existing portfolio exposed to the risks wrought by a widespread epidemic is already part of the plan. All you need to do is follow it.
Admittedly, that’s often easier said than done. Here are a few reminders at to why sticking with your existing investment plan remains your best financial “treatment.”
The downs make the ups possible. The stock market was up 30% in 2019. On average, the stock market corrects (down 10%) at least once per year and we experience a stock bear market (down 20%) once every three to four years. If not the coronavirus, something else will cause the stock market to go down; and then back up. Investments that never go down barely go up.
Markets endure. I by no means wish to downplay the socioeconomic suffering coronavirus has created. But even in relatively recent memory, we’ve endured similar events – from SARS, to Zika, to Ebola. Each is terrible, tragic, and frightening as it plays out. But each time, markets have moved on. Whether coronavirus spreads further or we can quickly tamp it down, overwhelming historical evidence suggests capital markets will once again endure.
“Journalists who reported flights that didn’t crash or crops that didn’t fail would quickly lose their jobs. Stories about gradual improvements rarely make the front page even when they occur on a dramatic scale and impact millions of people.”
— Hans Rosling
The risk is already priced in. The latest news on coronavirus is unfolding far too fast for any one investor to react to it … but not nearly fast enough to keep up with highly efficient markets. As each new piece of news is released, markets nearly instantly reflect it in new prices. So, if you decide to sell your holdings in response to bad news, you’ll do so at a price already discounted to reflect it. In short, you’ll lock in a loss, rather than ride out the storm.
“I’m assuming there will be no apocalypse. And that’s almost always, if not quite always, a good assumption.” — John Bogle
If you’re not invested, your investments can’t recover. Few of us make it through our days without enduring the occasional moderate to severe ailment. Once we recover, it feels so good to be “normal” again, we often experience a surge of energy. Similarly, markets are going to take a hit now and then. But with historical evidence as our guide, they’ll also often recover dramatically and without warning. If you exit the market to avoid the pain, you’re also quite likely to miss out on portions of the expected gain.
“The irony of obsessive loss aversion is that our worst fears become realized in our attempts to manage them.” — Daniel Crosby
Bottom line, market risks come in all shapes and sizes. This includes the financial and economic repercussions of a widespread virus, be it real or virtual. While it’s never fun to hunker down and tolerate risks as they play out, it remains your best course of action.
If you haven't implemented an evidence-based investment allocation and/or if you lack the confidence that comes from a deliberate and thoughtfully crafted financial plan, I would enjoy the opportunity to help you get there.