Coronavirus is killing the markets. What can an investor do?
The markets in March suffered their biggest fall since ‘Black Monday‘ back in 1987.
The average investor with their future security tied up in a traditional pension plan may well be feeling powerless to stem the blood-letting.
In many cases, sitting tight amid the mayhem and stock market contortions could be the best approach, though some more proactive people believe there are steps an investor can take to limit the damage. We agree…
Coronavirus is spreading across the world, financial markets have crashed, volatility is increasing and major indices like the Dow Jones and S&P 500 dropped dramatically, falling hard enough to trigger a trading halt.
At this point in time, it is almost impossible to predict the human costs, but some very credible experts are claiming we should at least be prepared for a very serious pandemic. Dr. James Lawler, a well-respected professor of infectious diseases addressed the American Hospital Association and claimed that, in a worst-case scenario, more than four million Americans could be hospitalised, and this could lead to 480,000 deaths in America alone.
Many financial-sector commentators have treated the market’s response to this info, and the resultant downturn, simply as an issue of investor confidence, resulting from the corona virus’s ‘psychological’ effect on the markets. Trump himself has downplayed the threat of coronavirus and blamed the media for inflaming the situation. The Federal Reserve in the states has chosen to cut interest rates, suggesting the problem is access to cheap enough capital.
This is not right. Investors are not stupid, and investing is not as simple as “interest rates down, markets up.”
When investors assess the coronavirus situation and the markets drop as a result, this isn’t irrational panic. They’re worried about the human and economic costs of the virus itself. And part of the market’s analysis is its lack of confidence in the world’s ability to manage the crisis. These are very real and valid concerns.
China alone accounts for around 33% all of the global growth, and by recent estimates, it is responsible for over 25% of global manufacturing production. Furthermore, much of China’s economy consists of manufacturing things vital to many economies around the world. And it looks like China is simply shut down completely, at least in the worst affected regions.
Take Italy, another country hugely affected by the virus as an example; tourism accounts for over 10% of Italy’s GDP. If the virus cut that number by a conservative 50% it would destroy Italy’s already very lukewarm GDP growth (of under 2%), and drastically impair its already struggling banking sector. We could go on…
With all this in mind, anyone in the financial sector can see that the coronavirus has a huge potential to be a colossal economic event as well as a terribly serious and tragic health crisis. The Organization for Economic Cooperation and Development estimates the virus could cut global economic growth by 50%, or even worse.
Many are now bracing themselves for what could be a global recession in the making
Are you ready for the roller coaster?
Daniel Ives, MD of equity research at Wedbush Securities, told ABC News online:
“For the average investor, this is going to be a roller coaster over the coming months, and it’s one where you need the stomach for the volatility just given what the coronavirus outbreak is creating globally,” he said. “If you don’t like roller coasters, then you should probably take some chips off the table because it’s going to be a pretty volatile ride over the next few weeks.”
David Bahnsen, the chief investment officer at The Bahnsen Group, told ABC News ”The present volatility is a roller coaster, and roller coasters go up and down,” he said. “It will settle in due time, but for now, investors should expect it to continue, and to be a poor environment in which one can make rational and thoughtful decisions.”
In situations of widespread uncertainty like this, Bahnsen recommends assessing your own personal risk tolerance and diversifying investments.
“An intelligent asset allocation that is designed around your risk tolerance and is truly diversified is your best defense against coronavirus market volatility,” he said. “And it will be your best defense against the next bout of market volatility as well.”
Alex Chalekian, Founder and chief executive, Lake Avenue Financial, Pasadena, quoted in the L.A Times believes that it still may be possible for investors to stem some of their downside risks even though there are “going to be huge ripple effects” from the virus yet to be experienced. “We are in uncharted territory here,” he said. He raises the possibility that the coronavirus could have a far more reaching impact on the world economy than outbreaks of past viruses and he has become increasingly concerned and has moved funds into less risky assets, such as alternatives.
Kevin Barlow, Managing director, Miracle Mile Advisors states: “One of the prime concerns now is whether the coronavirus and the drastic responses by governments and companies will cause not only a temporary disruption in the economy but affect fundamentals, especially if layoffs start and hiring stops.
“That’s going to affect markets more like nine to 12 to 18 months out and may have impacts throughout the rest of this year and into next year. And I think that is where a lot of the fear lies right now,” he said.
So, to put it simply – What to do?
So what is the intelligent investor to do? Of course, there are different strategies. Komal Sri-Kumar, President, Sri-Kumar Global Strategies says if you are in your 20s, it would OK to “get your toes wet” by buying into the market now and on a consistent basis as it keeps going down, an approach called dollar-cost averaging. “If you are in your late 50s or older, then I would say just sit tight if you have a good manager and wait for the correction to be over. Don’t get out and into cash because then not only don’t you have equities but when the recovery takes place, you have nothing to go up with,” he said.
David Bailin, Chief investment officer, Citi Private Bank, New York kind of agrees: “I would give the same advice to my father as I am going to give a wealthy client in this environment,” he said. “Do not sell equities when markets have had this big a move. I have to say that wealthier people are actually investing now, because they have the benefit of being able to think five to 10 years out, and they know these are times you can get very, very good values.”
Great advice! If you have years to recover, can absorb some significant losses and don’t mind that wait. But how to protect yourself without retreating into cash – or be prepared to risk playing the long game?
Since alternatives tend to behave differently than typical stock and bond investments, adding them to a portfolio may provide broader diversification, reduce risk and enhance returns. Investors should choose alternatives that align with their personal goals, which may include: mitigating stock market volatility, lowering correlation to traditional markets, investing capital for a longer/shorter time frame in exchange for higher return potential, and hedging a portfolio against inflation or rising interest rates.
The message now?
Diversify... Diversify... Diversify...
When the markets experience sudden drops, most investors hope the value of their investments doesn’t go with them.
Non-correlated assets, or so-called alternative investments, offer the potential for at least some of your assets to stay put when the markets hit the skids.
And more investors seem to be warming to areas outside of traditional equities and bonds in light of recent market volatility. A December survey of 500 high-net-worth investors found that many are turning more to areas such as private equity, real estate and hedge funds – The alternative investment marketplace. Meanwhile, those investors, who have portfolios of $250,000 or more, are slowing down their allocations to traditional stocks, bonds and mutual funds.
“This volatility has created an awareness of the need to diversify,” said Gary Anetsberger, CEO of Millennium Trust Company, which conducted the survey.
The Alternative Investment Platform – Your guide to the truth about the Alternative Investment Marketplace
- Myth: Investors cannot access their money if they invest in alternatives.
- Myth: Only institutional and ultra-high-net-worth investors can access alternatives.
- Myth: Alternatives have failed to protect investors during market downturns.
- Myth: Alternatives are too expensive.
Protect your future – Explore the Alternatives