Investors have now experienced their first disruption of the year: The Coronavirus. The investing experience is no stranger to unexpected surprises- and, while the downdraft this week was unexpected, it certainly was not unprecedented. I have attached 2 VERY good pieces for you to look at this weekend- 1) A chart showing all Epidemics and Stock Market Performance since 1980, and 2) a great report on Coronavirus by a well-known economist in our industry that my team and other top advisors stay in close touch with, Brian Wesbury of First Trust.
Long term investors cannot and should not try to predict if this is the start of a longer trend or an isolated time period. The only other 1,000-point drops (like we had this week) for the Dow Jones Industrial Average (DJIA) were on February 5th and 8th of 2018. Since then, the DJIA went on to make many new highs.
The Coronavirus is serious and there is no surprise that its spread is affecting some companies’ potential earnings. If this flu-like virus worsens, some corporate earnings in some specific sectors could be heavily impacted, and the stock market may continue to sell off. If this is like the SARS scare or other epidemics, it could prove to be only temporary. In fact, if the market sells off, behavioral finance teaches us that investors with cash could be looking at good entry points to buy high quality stocks on sale. Economic and stock market crises are frightening when they happen, but they can also provide entry points for investors that actually want to “buy equities at lower prices”.
We have had a large number of our clients call in this week and move over cash to buy more stocks in their accounts. And, even if we aren’t at or close to the bottom yet, they are still buying at an over 10% lower price point today than a week ago, which should pay off nicely long term. And my advice has been to look at this in several “tranches”- meaning if it drops another 10%, then buy in again with an equal amount, etc. I’m not saying this is easy- IT’S NOT, but historically the best investors in the world buy when there is blood in the streets. Remember, the markets trade fast these days, and the big institutional investors will program trade large orders as this thing falls and likely whipsaw the market back up. You do not want to get caught selling in periods like this- and if you can’t buy because you are retired, or don’t have excess cash, then stay diversified and don’t sell your stocks. If you are 50/50 (stocks/bonds) for example, and don’t have additional cash, you could always move up in stocks to 60/40 as a way to buy more stocks using your existing portfolio. Just a few ideas to consider….
We are watching this and all other events carefully and want to take a moment to remind you that long term investors will experience volatility and periods of uncertainty. Our goal is to help invest and not speculate on the way towards meeting your financial goals. For the next few weeks, as always, please try to avoid making any emotional decisions based on media magnification. Remember, investing is a long-term process to achieve results that help meet your specific goals.