Financial Prescription for Coronavirus

The term “novel coronavirus” is new, 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 infect our economy? Today, markets are sharply lower on global fear with more cases being announced outside China in Italy, South Korea and Iran. It's hard to say if the coronavirus will be different from past epidemics that previously have had relatively minimal long-term effects on stocks. But should you try to dodge markets that have been exposed?

We continue to recommend that investors remain at their long-term strategic equity allocations. 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 do is follow the plan if you’re already following an evidence-based investment strategy:

You’ve already got a globally diversified investment portfolio aligned with your strategic plan.
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.

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 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.

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.

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.

Our advice is simple:

Do try to avoid health risks 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.