We are all watching with concern the spread of the new coronavirus.The uncertainty is felt around the globe, and is unsettling on a human level as well as from the perspective of how markets respond.
As risk increases during a time of increased uncertainty, the returns investors demand for bearing that risk pushes prices lower. This causes markets to decline sharply, as they have recently. These declines are certainly distressing to any investor, but they also demonstrate that the markets are functioning as we would expect.
Stock markets around the world are experiencing fluctuations in value that, while they can be scary in the short term, are normal and were accounted for when, in the case of my clients, our investment strategy was determined. Each and every one of my clients owns a "ladder" of CDs and government bonds that has been stable, or has appreciated, during this period of market dislocation.
The remainder of client funds are invested in a well diversified, low cost equity portfolio, with hundreds or thousands of companies in many countries. My investment approach is based on the principle that, over time, equity prices will provide positive returns to compensate those who bear today's risk.
This has been a lesson of past health crises and of market disruptions, such as the 2008-2009 global financial crisis. Historically, U.S. equity returns following sharp downturns have been positive (see article below). A broad index tracking U.S. data since 1926 shows stocks have generally delivered strong returns over one-year, three-year, and five-year periods following steep declines.
Many of us have found ourselves obsessing about the coronavirus, due to the perfect storm of distractibility, uncertainty, and the negativity bias of our brains. We may feel the need to "do something," to give ourselves the illusion of control.
Before you make changes to your long term wealth accumulation strategy that you may regret, I recommend you check in with yourself. Take a deep breath and ask yourself:
- how am I feeling physically?
- how am I feeling emotionally?
- how have my values, goals and life situation changed, if at all?
So, if you need to do something, what can you do?
- mortgage rates have declined. Consider refinancing your fixed or floating rate mortgage, or roll that HELOC into your mortgage
- wash your hands, and be especially careful around family and friends with preexisting respiratory conditions, or the elderly
On a positive note, the tax filing deadline was extended by 90 days!