The recent headlines about the coronavirus outbreak have caused investors to panic and trigger a “flight-to-safety” that puts downward pressure on stocks, while giving a lift toward traditional hedges such as gold and bonds.
For example, the coronavirus has recently caused a decline in Chinese and emerging market stocks. Travel-related industries such as hospitality and airlines have also been impacted. Local Greenville businesses such as BMW, Michelin, and Boeing, which import and export goods with China, may be affected as well.
Investors are not always rational
Short-term speculators may wait until it “feels safer” again to step back into the markets. However, this never works consistently, and market timing is fruitless.
Research shows that investors feel the pain of a loss more than twice as strong as they feel the enjoyment of making a profit. For example, if you find a $20 bill in the parking lot, you get a sense of enjoyment as you visualize how you are going to use your new-found money.
On the other hand, when you go to spend money if you can’t seem to find a $20 bill you knew you placed in your wallet, you will get a feeling of panic or loss that is around twice as great as when you found the money.
Investors want to react
Now think about when you look at your financial or brokerage statements. If you look at your portfolio daily, there is a 50/50 chance of seeing a loss. When you see such a loss (perhaps due to the coronavirus or fill-in-the-blank current event), your brain wants you to automatically react. This reaction of wanting to do something can permanently damage your portfolio in the long run.
The average stock investor underperforms the market over long periods of time due to over-trading and overreacting to fear and greed. They buy high and sell low. That is why the most important quality for an investor is temperament, not intellect.
Face your fears with facts
Market performance is driven by fundamentals such as corporate earnings, interest rates, and the state of the economy. Whether the current fundamentals will change due to the outbreak — time will tell. Long-term investors, especially those who are young, should view short-term market volatility as a temporary sale on certain stocks and sectors.
I believe that apocalyptic thinking should never be the base case for any forecast, as it always tends to be wrong. To those who say, “This time is different,” I respond, “This too shall pass.”
Besides turning off the tv and reducing your media intake, to be an intelligent investor, I think intelligent investors should do three things:
- Focus on your goals.
- Focus on your long-term financial plan for achieving your goals.
- Focus on your portfolio as a funding medium to achieve your goals.
Hans Blake, is a Greenville-based chartered financial analyst and CPA who founded Intelligent Investing, a boutique wealth management firm serving high net worth individuals and families.