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COVID-19 and investing

2020-02-28, Michael Thompson

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COVID-19 and investing

First, we extend our thoughts and best wishes to those affected by the coronavirus. We hope nations around the world work together and take swift action to stop or slow the spread of this disease.

The intent of this article is to remind investors to review their long-term investing plans before reacting impulsively to this scare. Trying to sell equities now and buy them back at the bottom is a gamble that typically does not pay off. Sticking to a rebalancing or dollar cost averaging strategy would actually lead you to buy more shares as prices drop, which most experts would say is smarter. Of course, if you need funds soon you should not be exposed to risky assets (if you are you may indeed be forced to sell now at a loss). Below we'll discuss a few things you might want to consider before making changes to your investment plan.

Did you know the best and worst trading days typically occur very close to one another (see point 3 here)? If you sell equities after a bad day or week you are at a historically higher risk of missing the best daily returns. Also, historically missing the 10 best-performing days in a 20-year period is enough to cut your returns in half!

There's also a famous quote from Warren Buffett relevant here: “be greedy when others are fearful.” Indeed, some of the best buys in equities have come at times of extreme fear. Buffett's Berkshire had saved roughly 130 billion USD in cash at the start of this year, money he's likely to invest during this crisis.

No matter what you hear, no one knows when or where the bottom will be. A small fraction of people may get it right, just as a small fraction of people will win the lottery. Historically stock prices have been very irrational in the short-term. A news headline (even the slightest change to how it is worded) or the timing of new government / Fed policy can swing prices several percent or more. Do you really think you can predict how some reporter at CNN will word the news headlines over the coming months? Instead of trying to predict the bottom (or win the lottery), review or create a plan assuming you won't be able to. Long-term investors with excess cash may consider setting a handful of buy-in levels. Trading cash, treasuries or other safer assets for stocks upon certain events (e.g. buy X shares of VOO at 250 USD/share, buy Y shares at 240 USD/share, ....). It's typically better to set such plans upfront after careful consideration of your circumstances rather than watch the market and make emotional or knee jerk reactions if / when volitility strikes. For other opinions see this article from Vanguard and this article from CNBC.

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