Yesterday, there was another significant sell-off in the markets. The Dow Jones Industrial Average and the S&P 500 Index were both down nearly 10%. This follows two weeks of extreme market volatility and an overall steeply downward trajectory for the global stock market.
Despite the announcement of dramatic intervention by the Federal Reserve (promising $1 trillion in support through various means) in the US capital markets, investors remain unconvinced that the threat from the Coronavirus is fully understood, and that the government has a coordinated plan to address it.
Until both aspects of the outbreak are resolved, investors will continue to express their anxiety by selling investments they feel could fall in value. In this kind of environment, that means very few asset classes will avoid selling pressure.
Circumstances like these, which happen once or twice in a decade, offer an opportunity for us to stand with you and remind you that the best way to navigate a crisis is to remain steadfast, very carefully filter the information you take in, and moderate the way you react to it.
Yes, this crisis seems different and, yes, no one saw it coming and, yes, we do not know, right now, where it is going. However, human beings generally respond to crises with actions that are intended to minimize the possibility of harm. Unfortunately, these reactions do not serve investors well during periods of market turmoil.
For thousands of years, humans lived simple lives of survival. Life was difficult and life expectancy was short. Humans learned how to avoid peril. They avoided dangerous animals (e.g. lions and tigers and bears, etc.), threatening weather (e.g. lightning, blizzards, hurricanes, etc.), dangerous geography (e.g. rocky cliffs, swift rivers, rogue ocean waves, etc.), and other greedy humans who wanted their food, land or possessions. If you can imagine that kind of life, you realize that you’d be inherently programmed to avoid danger as soon as you sensed it.
We now live in a completely different world. But neuroscience tells us that our brains are still hard-wired to react to real or perceived as we did for thousands of years. The Coronavirus is clearly a risk. There is the risk that you, a loved one or a friend could contract it and become very ill, or die. There is also the risk that the virus could spread so widely that it impairs the global economy. Should that happen, the value of most assets will (temporarily) plummet and investors will see their retirement account values, home prices, etc. fall dramatically. The very natural reaction to both of these threats is to flee, as our ancestors did.
It’s very wise to try to avoid getting the virus by washing your hands frequently, using sanitizer, avoiding touching your face, cleaning communal surfaces often, and avoiding close contact with others (i.e. social distancing). These measures will help keep you healthy. That’s how you avoid getting sick.
What about avoiding investment losses? Unfortunately, your natural reaction to flee real or perceived danger won’t serve you well as an investor. If you sell assets that have (temporarily) lost value, you’ll make what was a “paper” loss a permanent, realized loss. This is not what you want, of course.
So, how do you avoid it? You need a strong, fundamental, and proven approach to investing. If you’re one of our clients, you do. Your portfolio’s design is grounded in decades of Nobel-prize-winning research. That research tells us that the keys to successful investing are proper asset allocation, broad diversification, tax-efficient asset location and cost control. This is precisely what we, at Springwater, do for you.
However, having a well-constructed portfolio is not enough. In times of crisis, we must add the management of emotions to the management of investments. We have a consistent, unwavering faith in our investment approach and we focus on making decisions accordingly. In the current environment, our focus should be on managing our anxiety and avoiding the very behavior that kept us safe throughout human history – flight to safety. Because if we move out of the market in an effort to avoid losses, we will have, rather ironically, realized them.
So, just as now is the time to hunker down to avoid getting the Coronavirus, now is also the time to hunker down as an investor. Be steadfast and have faith that like all crises before it, this one shall pass.