What is different this time and how should investors react to the Coronavirus?
First, note that I didn’t say “how we should react as fellow human beings” to the Coronavirus.
Concerns about health-related issues are always serious and any human suffering should not be taken lightly. Our thoughts and wishes are for everyone to remain healthy and well.
Related to investing, however, keep in mind that the markets have experienced many large shocks before, including ones that were health related.
During times like these, the natural reaction is to take action. Humans are hard wired to move quickly and seek protection. This helps us avoid pain. These very survival instincts, however, can be detrimental to investing.
What should investors do?
If you have a diversified portfolio of stocks, bonds and cash, likely nothing.
This might sound overly passive but it actually requires a lot of discipline and active resistance of our instinctual emotions, especially in the face of minute to minute market headlines.
It is not easy for anyone (professionals included), and we can’t give specific advice without understanding everyone’s situation, but if you have an investment policy statement that sets long-term targets for stocks, bonds and cash, stick to it.
When should you take action?
If you don’t have a diversified plan that is anchored on an Investment Policy Statement, get one.
Before investing or making changes, set or revisit long-term investment goals, and risk, liquidity and asset allocation targets that are designed to meet long-term objectives.
If you write down goals prior to investing, and revisit them before taking action, it is easier to stick to a plan versus letting emotion or the competition of the market take over (we are all human).
Investment policy plans don’t need to be complex.
An Investment Policy Statement (IPS) can simply set long-term targets for various asset classes and maximum and minimum risk control ranges around the targets. This way, regardless of the emotion of the market, you can keep yourself from making big bets that might turn into big mistakes.
As an example, a moderately risk-adverse investor might consider having a long-term target of 60% in equities with a low-end range of 55% and a high-end range of 65% (generally, the tighter the ranges the greater the risk control).
If the market drops significantly and the equity allocation goes below the minimum range, the IPS mandates that an investor buy. On the other hand, if the market has run up significantly, the maximum IPS ceiling forces selling to take some chips off the table.
For more on how a similar approach, deploying only a few index funds, has consistently outperformed some of the more complex, well-resourced and well-researched strategies in the world in up and down markets, across multiple market cycles, read the following:
More on how Wall Street has a poor record of picking managers and strategies that can outperform in good times or bad, and how they also have a “spectacular zero” percent track record of predicting down turns, can be found in these articles:
In saying all of this, we’re not suggesting that fear about health-related issues are irrational. They can be quite personal and should be taken seriously.
Even though the evidence consistently suggests that market forecasts and hot manager picks might not be worth much, we aren’t saying that you shouldn’t look at data and keep an eye out for opportunities. Data can absolutely help you develop a long-term plan you feel comfortable enough to stick with through both good and bad headlines.
All we’re trying to reinforce is this.
Nothing tends to be different related to the long-term effectiveness of this very old saying about the virtues of a simple diversified plan:
“I thank my fortune for it,
My ventures are not in one bottom trusted,
Nor to one place; nor is my whole estate
Upon the fortune of this present year:
Therefore, my merchandise makes me not sad.”
Merchant of Venice – Shakespeare