Financial Decision Making in a Crisis (COVID-19)
The Coronavirus (COVID-19) is both a medical and a financial crisis. There is no question that the arrival of this virus and its effect on the entire world has had a dramatic effect. It recalls a famous poem by Rudyard Kipling:
If you can keep your head when all about you
Are losing theirs and blaming it on you,…
Yours is the Earth and everything that’s in it,
And—which is more—you’ll be a Man, my son!
Most humans overreact to bad news; it’s human nature. We don’t want to minimize a global pandemic but we are surrounded by viruses all the time and live to tell the tale. Most of us lived though the Swine flu, the Zika outbreak, Ebola as well as the annual flu for which we get shots yearly. In the 2017 – 2018 season the seasonal flu killed 61,000 people.
But this time, reacting to predictions of millions of deaths, government officials around the world shut down entire countries.
The market reaction was immediate and sharp. Within three weeks the Dow Jones Industrial Average dropped 10,000 points. Economists are almost unified in predicting that we’ll see a recession during the second quarter.
There are a few important things to keep in mind.
- Declines in market prices are perceived as losses. They are not, unless you sell. Then you lock in a loss and you’ll be out of the market when it rebounds as it always does.
- Uncertainty, not fear of losses, is the largest driver of investor markets. When uncertainties are removed, confidence returns.
- Avoid TV “Experts.” Remember that the networks are in the advertising business and they grab your attention with scary stories not to inform you but to sell you, the viewer, to their advertisers.
- Successful investors take a long view. Market panics are an opportunity to buy investments when they’re on sale.
People hire financial advisers for their expertise and for a strategy aimed at reaching their goals. Having a strategy and sticking to it in good times and bad removes emotion from the investing equation. We create portfolios that will weather temporary storms like this.