Please don't hesitate to reach out to me to discuss what the coronavirus could mean for the economy and, more importantly, for your portfolio. I would be glad to share my perspective and learn from yours. In the meantime, here are some summarizing thoughts:
The worst outcome is rarely the most likely outcome. It is not inconceivable that a few years from now we will be trying to remember what the coronavirus was all about. For one, I know I had to brush up on my SARS, Swine Flu, and Zika viruses; what it was, when it happened, and what if any impact it had on client portfolios.
In the short-term, your portfolio is not immune from the virus, but there are 3 things to keep in mind:
Diversification helps. Not all assets will react the same. For example, Treasuries and gold are up significantly, offsetting stock price declines.
The lower your portfolio risk level, the less impact you will see from the coronavirus. For example, if your portfolio is a 60 on a risk scale of 0-100 you will not experience the kind of headline-grabbing swings you see in the stock market.
If your portfolio risk level is high by design, this is not per se a bad situation either. Ideally a risky portfolio is owned by someone with a long time horizon and/or an ability to add funds. New money is being put to work at lower prices today than a month ago. That translates to higher profits in the future.
In the long-term, we have way more control over our portfolios than does the coronavirus. The world and the markets will move on. If we don’t make any rash or emotional decisions today, then there is no reason to believe our financial outcomes will be any different 5-10 years from now, than they would have been had we never been introduced to COVID-19.
Actions to consider:
Rebalancing – Selling that which is newly expensive, and buying that which is newly cheap, bringing your portfolio in line with your target and thus buying low and selling high.
Lateral trades – Selling an asset that is down and buying another asset that is down as well but that you believe to have better future potential.
Tax loss harvesting – similar concept as lateral trades. You would sell an asset to take a tax loss and buy back a similar asset, so as not to lock in a permanent loss of capital. Then 30 days later, you can reverse the transaction if there are no negative tax consequences from doing so.
Actions to avoid:
Selling into a falling market - Call on the contrarian in you. As a species we might be herd animals, but we are also endowed with individuality. Going against the crowd – which is stampeding out of the market – is very difficult to do. But no one ever got rich from doing what everybody else is doing. These are times when small and large fortunes are made and lost. Selling out might provide temporary relief, but the evidence is overwhelming that this leads to capturing most of the downside, while missing out on the juiciest piece of the recovery. After all, when you got out after a big loss, how are you going to convince yourself to get back in before the coast is clear and the ship has sailed?
Don’t bet the farm on buying the most beat up assets - Yes, it is good to be greedy when others are fearful, but that does not mean it pays off to make hasty, outsized bets on things like airlines, hotels, cruise lines, casinos, etc. Some will be very attractive and worth researching, but they are also down for a reason: risk.
While I think the risk to your financial health can be managed, in no way am I trying to minimize the human toll of this outbreak, or outbreaks like these. Not only in terms of lives lost, but also in terms of lives affected by the economic impact. Certain industries – like the hospitality, airline, and food services industries – have lost business they cannot recoup. They also employ many hourly workers who live paycheck to paycheck and have lost wages to contend with.
But, life will get back to normal at some point. Perhaps in Asia that point will be reached first, giving some comfort to the rest of the world that we can bend the curve of this thing. The headlines will switch from reporting growth in new COVID-19 cases, to reporting progress towards a vaccine, improved diagnostics & spread prevention efforts, and unrelated news stories that are clamoring in the background for attention.
Again, feel free to connect with me if you have any questions.
Jan Schalkwijk, CFA
JPS Global Investments
Want more insight? Feel free to reach out. We would love to chat!