The term “novel coronavirus” is so new, some people have 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?
Our 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.
But do not let the breaking news directly impact your investment stamina.
- If you’re already following an evidence-based investment strategy …
- You’ve already got a globally diversified investment portfolio.
- It’s already structured to capture a measure of the market’s expected long-term returns.
- You’ve already accepted (at least in theory!) 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 on why sticking with your existing investment plan remains your best financial “treatment.”
Markets endure. We by no means wish to downplay the 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 C. 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.
“[T]he 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 likely remains your best course of action.
I hope you find this helpful and welcome the opportunity to discuss the recent market events or any others of interest or concern to you.
If your investment plan no longer reflects your goals, let us know; we’re here to help you live the life you want to live.
As always, please share this information with someone who might be in need of financial advice and let them know that I will be happy to meet with them and, at no cost or obligation, provide a 2nd opinion about their financial situation.