By Matthew Gaude & Shawn McGuire
When it comes down to it, the markets hate uncertainty and tend to respond with increased volatility. That uncertainty can stem from anywhere, such as election season, trade wars, natural disasters, and, right now, a deadly viral outbreak that is starting to spread. With the Dow Jones and S&P 500 down 1.6 percent, (1) tour groups for Chinese citizens overseas suspended, (2) and quarantines occurring, should you be worried about your money? What could this outbreak mean for your portfolio?
A Look At History
This is not the first time an infectious disease crisis has caused lost sleep, but does it really spell disaster for the economy? Between SARS, Ebola, and others, what we’ve seen happen is a short-term drop as news comes in, then a stabilization as we learn more of what to expect. Here’s how the S&P 500 has responded to other outbreaks, some much more extreme than the Coronavirus so far.
Data is similar for equity performance across the globe based on data from Charles Schwab, tracking the MSCI All Countries World Index. The index has gained an average 0.4% in the month after an epidemic, 3.1% in the ensuing six-month period and 8.5% a year later (see graphic below):
The severity of the virus, ultimately, will dictate the market’s reaction and just because indexes had managed to shrug off the contagion from outbreaks in the past doesn’t mean that will be the case this time.
For one, the coronavirus comes during the important Lunar New Year, when Asia tends to see peak travel and consumer spending. As of Friday, Beijing had shut down parts of the Great Wall, as well as more than a dozen cities, restricting movement of some 50 million people, and canceling many events related to the Lunar New Year.
What Can We Expect?
But as we all know, historical data can give us a framework for future events, but we cannot pinpoint exactly what the markets will do, especially since context is important. In this case, we are coming off of market highs (4) and experts are already predicting that growth will slow this year. (5) Then, we have a sensationalist presidential election in the works, which tends to breed some extra volatility. Finally, the severity of this virus will also play a role in how the markets are affected long term.
And the timing could not have been worse for this outbreak, as it is happening during the celebration of the Chinese Lunar New Year, which marks the biggest human migration happening annually. During this time, up to 3 billion trips will be taken by Chinese citizens to be with family. (6)
If this virus continues to spread globally, limiting travel and causing people to be more conservative with their spending, we could see other sectors of our economy impacted. For example, travel-related companies have already been suffering. American Airlines, Delta, Wynn Resorts, and other businesses in the travel, tourism, and hospitality world have lost value. (7)
So, while we can’t tell you exactly what to do with your portfolio, because there’s no way to predict what the markets will do in response to the unknown, we can rely on time-tested principles to protect our money no matter what happens next.
1. Avoid Emotional Investing
First, let’s talk about what you shouldn’t do. One of the most important rules in investing is to refrain from making emotional decisions. Multiple studies have analyzed how our emotions affect our investing results, especially when we chase above-average returns. A 2018 DALBAR study revealed that investors’ decisions were the biggest reason for underperformance. (8) Simply put, behavioral biases lead to poor investment decision-making.
You also don’t want to start making major changes to your account in anticipation of a downturn. Erring too much on the side of caution too many years ahead of retirement may prevent you from gaining the potential returns you need to retire on your terms. For example, in a panic, some investors may sell stocks and pursue safer investments like annuities, bonds, and cash.
Instead, relying on an experienced professional to help you understand your options and control the risk you take with your retirement money will allow you to react unemotionally to a rising and falling stock market—instead of guessing what to do next.
2. Diversify Your Portfolio
You’ve heard it a thousand times, but that doesn’t make it any less important: Don’t put all your eggs in one basket. This means not only diversifying between stocks, bonds, and funds, but also among different investment strategies. In this way, you can attempt to minimize the negative impact on your overall portfolio.
Rebalancing is one key factor in keeping your portfolio safe. It’s not enough to create proper diversification and just walk away. You need to regularly analyze your portfolio to ensure that it still reflects your appropriate level of risk and that you haven’t become too reliant on any one asset category.
3. Tune Out The Headlines
We’re not suggesting you stick your head under a rock, but remember that the media’s job is to grab your attention and make you panic. So turn off the television, unsubscribe from the daily email updates, uninstall the stock market apps from your phone, and stick to your long-term strategy that was built to withstand dips and crises.
4. Make A Plan
The only long-term guarantee in investing is that there will be short-term fluctuations. Regardless of what causes them, we’ll experience bull markets, bear markets, and volatility in the decades ahead just as we have in the past. Rather than fear change or uncertainty, focus on preparing for it. If you have questions about your portfolio or investment goals, the Live Oak team would love to help. Call our office at 770-552-5968 or email firstname.lastname@example.org. Or, if you prefer, you can simply click here to schedule an appointment online.
Matthew Gaude is an *investment advisor representative and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. Working first as a commodity broker and then as a Business Development Manager for a national broker-dealer in previous jobs, he has the insight and experience to help clients understand the complexities of the market and implement strategies to minimize risk. To learn more about Matthew, connect with him on LinkedIn or visit www.liveoakwm.com.
Shawn McGuire is a financial advisor and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. He has worked in financial services since 2002 in positions ranging from financial advisor to stock broker and portfolio manager. As a CERTIFIED FINANCIAL PLANNER™ professional, he is trained to help clients with virtually all their financial needs. To learn more about Shawn, connect with him on LinkedIn or visit www.liveoakwm.com.
Securities offered through American Portfolios Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through *American Portfolio Advisors, Inc., a SEC Registered Investment Advisor. Live Oak Wealth Management, LLC is independently owned and not affiliated with APFS or APA.
Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc. (APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk, and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors. Seek tax advice from a tax professional.