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.
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.