A timeless investment lesson learned from coronavirus

Our advice is simple: Don’t let the breaking news directly impact your investment stamina. If you’re already following an evidence-based investment strategy …

• You’ve already got a globally diversified investment portfolio. 
• It’s already structured to capture a measure of the market’s expected long-term returns.
• You’ve already accepted (at least in theory!) that tolerating a measure of this sort of risk is essential if you’d like to actually earn those expected long-term returns. 
• You’ve already identified how much market risk you must expect to endure to achieve your personal financial goals; you have allocated your investments accordingly.

In other words, leaving your existing portfolio exposed to the risks wrought by a widespread epidemic is part of the plan. All you need do is follow it, because …

1. )  Markets endure

Not to downplay the socioeconomic suffering coronavirus has created, but we’ve endured similar events. Each time, markets have moved on.

To illustrate, consider a globally diversified all-equity portfolio, divided equally among Canada, U.S., and non-North American holdings. The SARS epidemic may most closely resemble current events (at least so far). What if you simply bought and held this portfolio since around the time SARS hit the headlines in February 2003? Your investment would have gone up 8.9% per year.  Or in dollar terms, it would have quadrupled!

Here are other examples of the same:

“Journalists who reported flights that didn’t crash or crops that didn’t fail would quickly lose their jobs. Stories about gradual improvements rarely make the front page even when they occur on a dramatic scale and impact millions of people.” — Hans Rosling (Author of Factfulness) 

2.) The risk is already priced in

The latest news on coronavirus is unfolding far too fast for any one 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.

“I’m assuming there will be no apocalypse. And that’s almost always, if not quite always, a good assumption.” — John C. Bogle (Founder of Vanguard)

3.)  If you’re not invested, your investments can’t recover

Few of us make it through our days without enduring the occasional moderate to severe ailment. Once we recover, it feels so good to be “normal” again, we often experience a surge of energy. Similarly, markets are going to take a hit now and then. But with historical evidence as our guide, they’ll 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.

“[T]he irony of obsessive loss aversion is that our worst fears become realized in our attempts to manage them.” — Daniel Crosby (The Behavioural Investor)

Bottom line, market risks come in all shapes and sizes, including the financial and economic repercussions of a widespread virus, be it real or virtual.  While it’s never fun to hunker down and tolerate risks as they play out, it likely remains your best course of action. 

Steve Lowrie holds the CFA designation and has 25 years of experience dealing with individual investors. Before creating Lowrie Financial in 2009, he worked at various Bay Street brokerage firms both as an advisor and in management. “I help investors ignore the Wall and Bay Street hype and hysteria, and focus on what’s best for themselves.” This blog originally appeared on his site on on on Feb. 6, 2020 and is republished here with permission.