Coronavirus – not to be sneezed at!!

World events constantly impact upon both human lives and economic growth, which can drag down global equity markets.

Today that event is COVID-19, better known as the coronavirus. Next week — perhaps even tomorrow — it could be something completely different.

Investors are understandably concerned about what they should be doing…indeed human beings are finely attuned to what we see as immediate threats. It’s how we evolved. But it isn’t always helpful.

The chances of any one of us catching the coronavirus, let alone dying as a result, are extremely small. Of course, we should take precautions and avoid unnecessary risks…but worrying about the coronavirus is a waste of time and energy.

So, what about the impact on your investment portfolio? Stock markets have fallen heavily over the past couple of days, and there’s no shortage of market “experts” in the media warning of further “turmoil” to come.

But the simple fact is that they just don’t know. Yes, coronavirus could develop into a global pandemic…or it could blow over in a matter of months. In any event, predicting what impact all the different possible eventualities might have on the economy, let alone the financial markets, is nigh on impossible.

Focus on what you can control

Remember that Discipline is the key to successful investing. What does discipline look like when the market melts down?

  1. Stick to your investment plan
  2. Stay diversified
  3. Focus on what you can control and let the rest go

You have no control over coronavirus or the markets…unless you’re a professor of epidemiology. Don’t kid yourself either that you have any unique insight into how the virus might develop…and remember, markets could go sharply up or down from where they are now for reasons totally unrelated to COVID-19.

“If history teaches us anything, it’s that great investment gains go to those who are diversified, optimistic and patient. In other words, if you spread your investment bets widely, favour stocks and have a long time horizon, good things should eventually happen

Jonathan Clements at HumbleDollar

However, if you are anxious about the markets — and it is a natural human reaction to be so — then consider the following:

  • Context – as scary as the current market reaction might be, such market losses represent a blip compared with the returns delivered since just the beginning of 2019. From 1st January 2019 through to 21st February 2020, our Portfolio 100 was up 18%.  Even with the market declines since 21st February, total return since the beginning of 2019 is still almost 13%.
  • Significant volatility – is a normal feature of markets. It periodically can and does happen.
  • Historical returns – 8.3% annualised returns for Portfolio 100 over the past 25 years have richly rewarded long-term investors. These returns include the impact of every bad thing that has happened.  However, only those investors who stayed exposed to the strategy have realised these historical returns.
  • Market prices – are set by a collective estimate of all asset-weighted market participants. A trade to move out of the market because one believes it should be trading lower based on Coronavirus (or any other reason) presumes that the investor has a unique insight that other market participants are not privy to or clever enough to see.
  • Market timing – while an ostensibly rational reaction, choosing when to be in or out of the market requires an absurd level of accuracy to be worthwhile. For example, from 1990 through 2018, the S&P 500 returned an annualized 9.3%.  Missing just the 25 single best trading days over the 29-year period reduced returns by over 50% to 4.2%.

Whatever you do, do not give in to your emotions. Ultimately, it’s not fear that’s rewarded in the equity markets but courage.

One final thing. If you’re in any way tempted to reduce the regular investments you make in the stock market, or stop them altogether, don’t. Keep drip-feeding your money into equities. If anything, invest more each month than you currently do, after all, stocks are cheaper now than they were.

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