Coronavirus – what this means for your investments.
In case you haven’t noticed, the news has been a little busy over the past month, with the leading headline a particularly nasty strain of Coronavirus called COVID-19, which is a cousin of the common cold virus that causes flu-like symptoms and can lead to pneumonia. We will leave it to the medical professionals to give the details on the virus and its spread. We will focus on your investments.
While there is still a lot of uncertainty surrounding the exact nature of the Coronavirus and its potential to cause widespread harm, the world economy is already feeling the effects of the drastic measures employed to slow the spread of the disease. People have avoided leaving their homes, travel has been restricted and some factories have temporarily shut down. Even if the U.S. avoids the worst of the effects, China has not, and, for better or worse, our economies have become tightly linked. Supply chains have already been disrupted, and U.S. companies that sell products in China have already warned of a steep drop in sales.
Accordingly, the stock market has seemingly lost its mind in reaction to the spread of the disease. At the recent low point on February 28th, the S&P 500 index was down more than 12% from its peak less than two weeks prior. While we fully expect a 10% decline to occur almost every year (even the good years!) this current “correction” has come suddenly.
What is the well-diversified, long-term investor who doesn’t want to join those who are panicking to do? The most important action to take from a financial perspective is to check your current asset allocation vs. your investment policy and rebalance if necessary. If you have a portfolio manager (like all TCV Trust & Wealth Management clients do), they do this on a regular and on-going basis, well before others rush to sell in a crisis. If you manage your own investments, then we generally recommend waiting until the difference between the allocation and the policy exceeds five percentage points. For example, with a 60% stocks/40% bonds portfolio, look to buy stocks/sell bonds if the stocks allocation falls below 55%, and look to sell stocks/buy bonds if stocks increase to more than 65% of the portfolio.
Note that we have not told you to buy Clorox (CLX) stock because everyone is buying bleach, or 3M (MMM) because they make masks or Costco (COST), because everyone is buying crates of water and tubs of Purell. (Sadly, Purell is made by a private company!) By all means, go to Costco and buy some water, bleach, masks and Purell, but you are chasing your tail if you try to pick and choose the “winners” from the Coronavirus – casinos are a more entertaining place to gamble.
While checking your investment policy and rebalancing is a lot more boring than giving your portfolio whiplash by selling everything and going to 25% gold, 25% cash, 25% canned food and ammunition and 25% Clorox “until the coast is clear,” the boring approach works much better in the long run, because your investment policy is designed to accommodate these situations. While a 10% stock market drop is painful (and we can almost guarantee a 30%+ drop sometime in the next 5-10 years), these types of risks should be built into your investment policy from the start. Stock investors earn higher returns than bond investors over a long period of time because stocks can fall so suddenly and deeply. Bonds are included in most portfolios to act as a stabilizer in times such as these.
Furthermore, this event, while scary and painful, is most likely transitory. We have had several pandemics in recent history, with a veritable alphabet soup of disease – SARS, MERS, H1N1, etc. In almost every case, the stock market was higher one year later. This track record includes the aftermath of the horrific Spanish flu in 1918, which killed 50 million people worldwide and 675,000 Americans. While we are categorically not predicting a repeat performance along these lines, it shows how stock investors who take a long-term view of earnings and dividend growth have been rewarded for their patience.
While the S&P 500 is down 10%, and the world economic activity has slowed, people will eventually return to stores and factories will start back up, and those 500 companies will earn profits and pay dividends, and we expect those dividends to grow this year and the year after, and so on. Over time, the increasing stream of profits and dividends should ultimately lead to more valuable companies in your portfolio 5-10 years from now.
So take a deep breath, be thankful you planned for this eventuality when creating your investment policy statement and are well-diversified, and if you must… go wash your hands!