With the coronavirus spreading panic and a market selloff over the last week, some are wondering how we should position our portfolios in light of a potential epidemic. As is usual under such circumstances, I prefer to take an historical perspective. Though history doesn't repeat itself, it certainly does rhyme and may give us a sound guide of how to proceed going forward. As such, I've attached a chart below which illustrates how the market has responded during the onset of other infectious diseases including SARS, Ebola and Avian Flu among others. Though such epidemics may certainly have an impact on the broader economy and market over the short term, you'll notice that over longer periods of time, the stock market has been "immune" to broader damaging effects.
Over the past decade, I was continually asked by prospective clients at the beginning of every year what they should do with the cash they have been sitting on as they have been too afraid to get back into the market after the financial crisis. Year after year rolled by with sound returns missed by these individuals who sat on large cash positions. Their usual response was that they were "waiting for the right time to invest and for a 10% or 20% market sell-off to do so". Unfortunately for them, every time a ~ 10% market correction occurred they were still too afraid to get into the market as whatever event was currently occurring kept them from investing. Now that the stock market has sold off more than 20%, one would think investors would be clamoring to finally enter again. However, we know that isn't the case as more investors are currently selling than buying and individuals are again too afraid to purchase equities.
With a bear market upon us and volatility continuing this New Year, fears are arising that a recession may be at hand. During such times, I believe it important to gain a perspective from past bear markets and recessions as we develop an investment plan going forward. Reacting to 500 point Dow rallies or tumbles certainly isn't prudent, thus I recommend turning off your televisions and reading books which may give us an historical viewpoint and strategies for surviving such tumultuous periods. Though I unabashedly recommend my recently published book, I also include a list of some books I would highly recommend and which have had the most influence on me.
Volatility has been on the rise in financial markets this year, and December seems to be unfolding as potentially the worst month of 2018 for stock market volatility. What’s unusual this year is that just about all asset classes are down at this point, which is a reversal of what we experienced last year in terms of both volatility and the return on our investments. In light of recent market trends, I answer some of the questions clients may be considering about the markets.
When an individual’s portfolio has reached a certain numerical value (i.e. $1 million, $2.5 million, $5 million, etc.), he tends to lock-in that valuation in his mind and is unwilling for it to move lower – at times even desiring to move to cash in order to preserve the valuation. If the market or his stock declines below the level in which he has locked-in the valuation, this can lead to irrational behavior driving the investor to sell his stocks at a lower valuation while also losing the dividend income from his investment.