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Over the past month, the Coronavirus (also known as COVID-19) has come to dominate headlines, and over the last week has been the prevailing narrative surrounding the recent stock market weakness. Given all of the uncertainty and fear, and the market approaching 10% correction territory, we thought we would share our take on the virus and how it should impact investment decisions for clients.
We wrote about the Coronavirus in our last monthly update, which you can click here to read. In our opinion, not much has changed in terms of anyone’s ability to make accurate predictions regarding this virus.
We do, however, need to make some assumptions and those assumptions are based on what we know and what we think.
So what do we know?
We know that the virus is spreading and that there is going to be some economic impact. What we do not know is when the virus will run its course and be contained, and we do not know how much impact it may have before it is contained. It is possible that the interruption tips foreign economies, and possibly the US, into a recession. We know that public altering its behavior will have an effect on company results, which should be most observable in anything that touches the travel industry. We also know that the virus is impacting the global supply chain, so some companies may be unable to meet demand. Ultimately, what this creates is a lot of uncertainty. In the market, when uncertainty rises stock prices tend to fall. It’s kind of like physics.
What do we think?
We think that the Coronavirus will ultimately run its course, but we do not know how long that will take. We think that from an economic perspective, the effects of the virus could prove to be transitory or episodic in nature. To the extent the virus leads to a sharper slow down, we would expect some kind of policy response. That response could be fiscal (spending or tax cuts), monetary (rate cuts or further Fed balance sheet expansion), or some combination of the two. We think that while the virus may turn out to be episodic and its effects one-time in nature, and thus less impactful over the intermediate and long-term, any policy response could have effects that are less transitory and more impactful over time.
What are investors to do?
Plenty of commentators will appear in the financial media encouraging investors to sell everything or make some other bold move with their portfolio. We remind clients and readers that the financial media is in the attention getting business in order to sell advertising, and not the advice business. Commentators and pundits are not invited to appear on financial television for their level-headed counsel, it is fear-mongering that sells.
Not every setback or known risk requires that an investor do something to their portfolio. We caution that increasing the number of decisions being made within a portfolio also increases the likelihood of making mistakes.
Let’s say an investor knew that the Coronavirus situation was going to get a lot worse, and the market was going to fall further. That investor would still be left with the decision on when to get back in. Typical investors anchor to their beliefs and, as a result, that investor may not decide to get back in until the market is higher than where they got out. In the end, the cost of a mistake may outweigh any gain from an initial correct decision.
What’s our view?
In our view, it is a lot of wasted motion, as well as emotion, based on the questionable premise that one can reliably time the market. In our experience, the average investor is not equipped to make those kinds of decisions. We have encountered many smart people over the years sitting on the sidelines because of some event, (An election, the US credit downgrade, a European credit crisis, Brexit, a debt ceiling, a government shutdown, the US/China trade war, some geopolitical event, etc.), while watching the market climb a wall of worry and waiting for some pullback to get back in. In summary, we think market timing is a loser’s game.
If the recent volatility in the market has you rethinking the amount of risk you should be taking, and you feel the urge to do something, then now may be an appropriate time to revisit your long-term asset allocation. Any changes should be made in the context of your long-term financial goals and objectives, not as a result of recent headlines.
We would welcome the opportunity to speak with you and review your portfolio to see if the risk being assumed aligns with your willingness and ability to take such risk.
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