I cannot tell you how bad things will get in the future for this virus or tell you how much it will affect your investments. My advice as always is to simply sit tight. If it gets really cheap, there is a potential opportunity and we will advise accordingly.

I have produced a table below to show how world equity markets have performed in recent epidemic scares.

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MSCI World Index: World epidemics and global stock market performance.

Source: Charles Schwab, Fact-set data for 1,2&3 month performance. Dimensional Matrix Book 2019 for That year and 1 year later. The MSCI Index captures large and mid-cap representation across 23 developed markets countries. With 1,646 constituents, the index covers approximately 85% of the free float-adjusted market capitalisation in each country.

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So how should we approach the news about COVID-19, better known as the coronavirus. We know that human beings are finely attuned to what we see as an immediate threat. It’s how we evolved. But it isn’t always helpful.

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What about the impact on your investment portfolio?

Stock markets fell heavily in the last few days and there’s no shortage of market “experts” in the media warning of further “turmoil” to come.

But the simple fact is that they just don’t know. Yes, coronavirus could develop into a global pandemic. Or it could blow over in a matter of months. In any event, predicting what impact all the different possible eventualities might have on the economy, let alone the financial markets, is nigh on impossible.

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Focus on what you can control

A very important principle in investing is to focus on what you can control and let the rest go.

You have no control over coronavirus or the markets. Unless you’re a professor of epidemiology, don’t kid yourself either that you have any unique insight into how the virus might develop. And remember markets could go sharply up or down from where they are now for reasons totally unrelated to COVID-19.

But, if you’re anxious about the markets — and it’s a natural human reaction to be so — please feel free to give us a call.

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“If history teaches us anything, it’s that great investment gains go to those who are diversified, optimistic and patient. In other words, if you spread your investment bets widely, favour stocks and have a long-time horizon, good things should eventually happen.”

Have you read any market forecasts for 2020 yet? There is something about the turn of the calendar year that brings out the thumb-suckers in the media as sage reflection on the year just past gives way to blue-sky speculation about the coming 12 months.

To be sure, there is an economic element in this. Newsrooms tend to thin out over the holiday season as staff are told to clear accumulated leave. Media outlets stockpile think-piece fodder from bankers and brokers to fill the gaps between the ads for a few weeks. End-of-year specials are a popular go-to feature.

This is why you are confronted with clickbait headlines at this time like “Ten Big Economic Surprises for 2020” or “Five Stocks You Can Count on in the Coming Year” or “Your Armageddon Portfolio: Bunker Down with these Shares”.

Last year’s predictions

Actually, there were plenty of these types of headlines around Christmas 2018 following the global equity markets’ worst calendar year performance in seven years. The US-China trade war was heating up, the Brexit saga was roiling markets and there was mounting evidence of a significant global economic slowdown in the pipeline.

So on New Year’s Eve 2018, CNN pitched in with a guest economist’s column titled How Populism will Cause a Crisis in Markets in 2019.  The argument was that the impossibly simplistic solutions enacted by populist politicians to the post-GFC stagnation in developed economies would come home to roost in the coming year.

How things panned out

The analysis appeared sound, but a year on and we’re still waiting for the promised reality check. Equity markets have experienced double-digit gains in 2019. The US market has kept breaking records, to be up more than 20%. Against most expectations a year ago, bond markets have had another stellar year, with yields reaching unchartered territory.

To be fair, expectations that 2019 would mark a brutal reckoning for markets were widely held. In December 2018, a survey by Natixis Investment Managers said two thirds of institutional investors believed the US bull market would come to an end in the coming year.

The biggest threats cited were geopolitical disruptions, such as Brexit and trade wars, while rising interest rates were also seen as posing a significant risk.

A year on and those issues grind on. Markets vacillate according to every tweet from Donald Trump, though the UK election has taken some of the wind out of the Brexit issue. As for interest rates, they have spent most of the year falling, not rising.

The growth slowdown also triggered a wave of downgrades by major brokerages and banks in late 2018. Barclays won headlines when it lowered its year-end target for the S&P-500 to 2750 from 3000, citing bearish retail investor sentiment and slowing growth outside the US. Actually, they got it right first time and should have stuck to the original call because the index was above 3100 going into December, or about 25% higher over the year.

The cataclysm that wasn’t 

Every year, you see these calls go awry, perhaps none so spectacularly as the headline-grabbing line from the Royal Bank of Scotland in early 2016, telling clients in a research note to ‘sell everything’ in anticipation of a “cataclysmic” year in markets.

“Sell everything except high quality bonds,” the bank told clients. “This is about return of capital, not return on capital. In a crowded hall, exit doors are small.” 

It would have been a shame for those investors who followed that advice, because global equity markets delivered a return of about 8% that year in US dollar terms. In fact, the total return of equity markets from early 2016 to late 2019, as measured by the MSCI All Country World Index was more than 40%.

Opinions are soon out of date

The truth is everyone can have an opinion about the market outlook, but that’s all they are — opinions. And the problem with writing economic commentary on the run is you are always responding to news. Within a day of writing it, it’s usually out of date.

To be sure, there is still a case for economic analysis. The problem arises when you try to connect long-term analysis to short-term speculation about market direction. Markets respond to news based on the collective expectations of millions of participations. This is another way of saying all those opinions are already reflected in prices.

In any case, an economic or market forecast is inevitably based on a bunch of underlying assumptions, anyone of which can be thrown awry by events. Nothing really is constant, which is why forecasting is such a tough and unforgiving business.

Don’t indulge 

The media’s need for big market calls that attract eyeballs is easy to understand. We’re naturally drawn to the idea that someone out there can see the future clearly. The reality, unfortunately, is that no-one can. Everyone is guessing. 

Seasonal speculation is fun and diverting. But you’re better off choosing something else to indulge in.

Picture: Denise Karis via Unsplash

A perennial temptation for investors is the urge to quit the market at the top and to get back in at the bottom. While the lure of market timing sells millions of books and is standard fodder for financial television, the reality rarely lives up to the promise.

History is littered with the failed dreams of market timers. Less than five years after the nadir of the financial crisis, some pundits were saying US stocks were over-valued. Another five years on and the market had gained more than 60%.

Not even the gurus have much of a record. Back in 1996, Federal Reserve chairman Alan Greenspan warned of "irrational exuberance" in the stock market. But we now know that the market went on climbing for three years before the dot-com bubble burst.

Even if your logic about valuations is impeccable, there’s no guarantee the market will come around to your view. As someone once said, markets can stay irrational longer than you can stay solvent.

But the most overlooked challenge with market timing is that it requires you to make TWO correct decisions: Firstly, you must get out at the right time. Secondly, and often more challengingly, you must know when to get back in.

Think back to the global financial crisis. Plenty of people were throwing in the towel by early 2009. But how many got back in in time to enjoy the big bounce that followed in the second and third quarter of that year?

The fact is markets don’t move in a straight line and big gains (and losses) can come in relatively short periods. Not even the professionals have much of a track record in successfully negotiating these unpredictable twists and turns.

So, if market timing is a mirage, what can you do? Here are five alternative options that make more sense — and none requires you to possess a crystal ball.

1. Take a long-term perspective

"The historical data support one conclusion with unusual force,” the index fund pioneer Jack Bogle once wrote. “To invest with success, you must be a long-term investor." Instead of trying to time the ups and down of the markets, why not simply change your time horizon? Over the very long term, patient investors have almost always been rewarded. Of course, not everyone can take the long view. Those, for example, who are about to retire or who need to access their money in the next two or three years, don’t have that luxury. But if you don’t need it for, say, 15 years of more, you can afford to look at the big picture.

2. Construct a portfolio for all market conditions

Everyone should have a balanced asset allocation — certainly a mix of stocks and government bonds, and perhaps property as well — that matches their capacity for risk. A defensively-minded person may only have 50% of their portfolio in stocks, with the rest in bonds. The right mix also depends on your age, goals and circumstances. Whatever your risk capacity, diversification is key. Spreading your risk across different asset classes and geographies will reduce the impact of a steep decline in one particular market. Ultimately, it’s your asset allocation that is going to be the most important driver of your investment outcome.

3. Periodically rebalance your portfolio

Generally, the less you tinker with your portfolio the better. That’s not to stay you shouldn’t touch it at all, but any changes you do make should be done in a strategic, structured and disciplined way that reflects your needs and circumstances. A good discipline to adopt is to rebalance your portfolio periodically, to restore your original asset allocation. This means, every year or so, selling sone of the winners and buying some of the losers. It seems counter-intuitive, but effectively it forces you to sell high and buy low, which is just what you should be doing. It's a much better strategy than falling victim to knee-jerk responses to the latest bout of market volatility, which inevitably involve emotional, short-term decision-making.

4. Pound cost average

Another option, if you really are worried about the stock market and want to reduce your risk, is “pound cost averaging”. Say, for example, you have a sizeable sum of money — an inheritance, say — that you want to invest. Instead of going all in and investing the full amount in one go, you can drip feed small amounts into the market over a period of time. Incidentally, financial economists don’t think this approach makes much of a difference from an investment perspective and you might end up with slightly lower returns. But it’s a useful way of helping you sleep at night and minimising regrets.

5. Increase the size of your cash reserve

Finally, another strategy could to consider is to hold a larger cash reserve — either within your portfolio or in another account. Everyone should hold enough cash to cover around six months of living expenses, in case of unexpected medical bills, or losing a job, for example. But nervous investors may prefer to hold rather more than that. The advantage of increasing your cash reserve is that, in the event of a market downturn, you can see it as a buying opportunity and use your extra cash to increase your market exposure.

SUMMARY

In summary, timing the market — while superficially an attractive idea — is fraught with danger. If you get lucky, great, but there’s no method to it. We’ve seen that not even the gurus are much good at it.

The good news is that second-guessing the market just isn’t necessary. With the right outlook and a methodical process, you can achieve better results — and enjoy a smoother ride along your investment journey.

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Picture: Veri Ivanova via Unsplash