If you have been following the news over the last few weeks, then by now you are aware that 1) there is a novel coronavirus spreading around the globe, and 2) global stock markets have been selling off as a result of the virus. On the former item, it probably goes without saying that we have no unique insight to bring to the table. However, the following article offers a reasonable assessment about how the virus may play out in the months to come.
The uncertainty related to the virus is seemingly open-ended. Since markets (and everyone else) hate uncertainty the related selloff can seem open-ended too. Add to this the fact that before the recent selloff, our research indicated stocks were trading at above average valuations, and we now have a perfect environment for a market storm.
So… is now the time to “manage risk” and sell stocks?
Long time clients and readers of our regular communications probably suspect our answer to this question is ‘no.’ We’re not attempting to wager or gamble by calling the bottom of the downturn, or making predictions about how the future will play out from here. We simply don’t know either of these things. Estimates of the fallout are wide ranging. From a relatively minor slowdown followed by V shaped recovery, to a more severe global economic recession.
After days of watching red on the screen, we can certainly empathize with investors who may want to “stop the bleeding” or “go to cash until things settle down”. The problem with this approach in the context of a long-term investment portfolio is that when things “settle down” markets are likely to be priced higher. The all-in or all-out approach to investing is dangerous in that it requires either predictive powers that no one possesses, or incredible luck. Neither is a good investment strategy.
The reality in financial markets is that investors pay a high price for certainty and comfort. Likewise, periods of loss and discomfort offer investors more favorable prices. We have selectively put money to work in client accounts with available cash and underweight stock positions over the last several days. We will continue to look for opportunities to deploy cash in the days and weeks to come. Stocks may very well fall further from here. But as a general rule, when making investment management decisions, it is far better to be approximately right than exactly wrong.
To be clear we are not cavalier about the risks associated with investing. But the management of these risks should be done prior to a market storm via appropriate asset allocation (i.e. having the right mixture of stocks/bonds/alternative assets) for your unique time horizon and objectives. See our firms five core principles for an outline of our philosophical approach to managing money and risk in an uncertain world.
If you are concerned about the downturn, it may be time to revisit your specific investment strategy to determine if any changes are in order. However, if your financial circumstances and time horizon have not changed since we developed your asset allocation strategy, then in all likelihood you should stay the course. As always, if you have any concerns at all please call us.
Remember, you don’t need an explanation for why markets go down in order to benefit from them. You just need the ability not to startle when the herd of investors suddenly makes an unexpected dash for the exits. Or, as Warren Buffett famously said, “be greedy when others are scared, and scared when others are greedy.”