It appears that the real risk to stock markets is an overreaction, to the overreaction, of currently understood effects of the coronavirus Covid-19. The best defense to such a reaction is a globally diversified portfolio with a proven strategy to weather market storms.
Viruses are a common part of human life. We live with them all the time. It is estimated that the flu kills 646,000 people worldwide each year. What is interesting when looking at Pandemic Influenzas over time, is that the more deadly the strain, the fewer total deaths that occur worldwide. The logic is simple, a very deadly influenza virus prevents transmission by quickly killing its host and by having such severe symptoms that sick people stay home or are hospitalized decreasing the spread of the virus.
With Coronavirus, symptoms can be very mild. It is currently believed that infected individuals may be contagious, but not show any symptoms. Or very mild symptoms can look like a common cold. If this current assumption proves out, then harsh containment like that in China is just delaying the inevitable spread of the virus. Some experts are even suggesting that Covid-19 will just become part of our “cold and flu season.”
There is still much we do not medically know about Covid-19, and as a result any prediction is still a best guess, and those guesses are changing rapidly. So what does this mean for your investments?
In a general sense, investment markets are volatile and unpredictable. These markets dislike uncertainty, which causes them to be even more volatile in the face of frightening news. Understanding this, there are two primary approaches to investing in the markets. One is to try and predict the movements up and down, and buy and sell based on those predictions. That is called “market timing.” The other is to accept that volatility is a fact and unpredictable, and design strategies that allow your long term goals to be met while accepting the short term volatility. That is primarily handled with “broad global diversification.”
At Navigoe, we have selected the second strategy, that of diversification – total and complete global diversification – of the equity investments combined with fixed income investments as part of that diversification. This strategy is relevant for any market shock, whether it be concerns around an election, global recessions, over exuberance, or a pandemic. We are investing for decades, not for months or years.
The strategy that we implement to deal with severe market downturns is to not sell stocks in down markets. If you are retired and taking monthly cash flow from your accounts, we will use the fixed income investments (bonds) to provide your cash flow. Most of you have from 8 to 12 years worth of fixed income to sustain current cash flow desires. If you are still adding to your investments, these events become excellent buying opportunities.
Looking specifically at the Covid-19 outbreak, much is still uncertain. What we do know is that the containment efforts in China have created significant delays in manufacturing in the country. That is affecting manufacturers all over the world. Additionally, the suspension or decrease of air travel is affecting a major part of the supply chain as a substantial amount of supplies are flown in the bellies of passenger jets. It does not matter if the extent of reaction in China is warranted, the short-term consequences are very real. Those consequences are added on top of already slowing trade due to tariffs and a weakening global economy.
In light of these facts, it is expected that the markets will reassess the value of the companies all around the world. And with so much still unknown, it is common for investors to get ahead of the worst possible news and sell now.
If Covid-19 does become a global pandemic, there will be companies, sectors and economies that win and lose from the effects of the virus as it works its way around the globe. But what does that mean for investors? It means that there will be some winners and losers as “speculators” try to predict the market and the effects on underlying companies. True investors, like all of you working with Navigoe, may feel “sick” at times, but your portfolios will ride through this storm.
One way to think about the broad global diversification of your portfolio is that you own the companies around the world that provide the good and services we, as a people, need to survive in our highly specialized, global economy. For every dollar not spent on travel, autos, or whatever, it is spent on something else, either now or in the near future. Maybe rather than fly to Asia for a vacation, a family decides to drive to our National Parks. At the end of the day, they will end up spending the same amount of money, which for most people in the world, is all of their disposable income. So while in this example, airlines and Asia tourist destinations have less income than expected, the economy around the National Parks will be higher than expected. The two effects cancel each other out. Taking that example globally, what really matters is the continued growth of all aspects of the global economy.
The result is that while we never predicted the current situation, and we do not know how this virus will play out, we do not need to know in order to have an investment experience that will allow you to continue to progress along your financial journey. There are fixed income assets to provide cash flow or buying opportunities as stocks tumble in the short term. There is total, global diversification of the stocks so that regardless of who ends up winning and losing from this crisis, your overall portfolio will ride out this storm.
Of course, if you want to discuss this in greater detail, and or evaluate how it will affect your specific financial goals, please do not hesitate to call the office or schedule an appointment to meet live, via phone, or via video conference.