Over the last several weeks, the coronavirus has grabbed global headlines. So far, U.S. markets have remained relatively immune. But should you try to dodge markets that have been exposed?
The answer to that question is simple: breaking news should not impact your investment program. A portfolio that is invested according to an evidence-based investment strategy is, by definition, already structured to capture a measure of the market’s expected long-term returns. You have already identified how much risk you are comfortable enduring in order to increase the likelihood that you will achieve your personal financial goals and your globally diversified investment portfolio reflects that.
In other words, it may feel counterintuitive, but leaving your existing portfolio exposed to the risks wrought by a widespread epidemic, or any other event for that matter, is already part of your plan. Now, you just need to follow it. Admittedly, that’s often easier said than done, but here are a few reminders on why sticking with your existing investment plan remains your best course of action.
Markets endure. The socioeconomic suffering coronavirus has created is horrific. But even in relatively recent memory, we’ve endured similar events – from SARS to Zika, to Ebola. Each is terrible, tragic, and frightening as it plays out. But each time, markets have moved on. Whether coronavirus spreads further or it is quickly gotten under control, overwhelming historical evidence suggests capital markets will once again endure.
The risk is already priced in. The latest news on coronavirus is unfolding far too fast for anyone investor to react to it … but not nearly fast enough to keep up with highly efficient markets. As each new piece of news is released, markets nearly instantly reflect it in new prices. So, if you decide to sell your holdings in response to bad news, you’ll do so at a price already discounted to reflect it. In short, you’ll lock in a loss, rather than ride out the storm.
If you’re not invested, your investments can’t recover. Markets are going to take a hit now and then. But with historical evidence as a guide, we know that markets also often recover dramatically and without warning. If you exit the market to avoid the pain, you’re also quite likely to miss out on portions of the expected gain.
Bottom line, market risks come in all shapes and sizes. This includes the financial and economic repercussions of a widespread virus. While it’s never fun to hunker down and tolerate risks as they play out, it likely remains your best course of action.