You would have to have been living under a rock for the past few weeks to not have heard of the corona virus, otherwise known as the Wuhan Virus, emanating out of the Wuhan province in China. It has caused mass panic in China and prompted the countries authorities to place all affected areas into lock down. Despite their best efforts the virus has managed to make its way to Europe, the USA, and even to us here in Australia.
What you have also likely heard is that this outbreak is going to absolutely decimate world markets. Phrases like “ASX to drop 1pc in global sell-off”, “ASX set to follow Wall Street lower as Corona Virus panic grips markets” or “Corona Virus fear grips world markets”. There is no doubt that fear has well and truly taken hold of world markets. However, as investors we need to sit back and take stock of what is really going on, what long term impact will this have on your portfolio, if any?
To know the answer to that question with any degree of certainty would require a crystal ball and a level of sorcery that I simply don’t possess, so I guess I’ll just leave the wild predictions to the “experts” who get paid enormous sums of money to come up with such pearls of wisdom as:
· “Sell everything” - Royal Bank of Scotland (RBS) advised clients in January of 2016 in response to a small correction of global markets
· “Pension funds and 401k’s (US retirement accounts) set for worst fall in recorded history” – US mainstream media outlets In response to Donald Trump winning US election in November 2016
· After the Sudden Acute Respiratory Syndrome (SARS) outbreak in 2003 investors were panicking about airline stocks, and tourism businesses. It was, apparently, going to herald a new age of telecommuting and the end of face-to-face meetings.
The truth is anyone who took the advice of the RBS in 2016 paid an enormous opportunity cost of lost potential gains from not staying invested in the market. The truth Is the election of Donald Trump had the opposite effect to what “experts” predicted, and SARS in 2003 – You guessed it…. The “experts” were wrong again.
The truth is that in 2003 during the SARS outbreak the S&P 500 (main US market index) dropped 8.3% and stocks related to discretionary spending and emerging markets (particularly China) under performed. At the same time, the price of gold jumped 4.8%. The good news is that over the next six months after the scare, the S&P 500 more than made up for its losses, gaining 18.6%.
More recently, the Middle East Respiratory Syndrome (MERS) corona virus spooked investors starting in late 2012. Between November and December 2012, the S&P 500 dropped 0.8% while the price of gold increased 0.5%. Notably though however, the S&P 500 bounced back from the scare much more quickly, gaining 15.1% over the next six months.
Importantly Bank of America healthcare analyst Yang Huang believes that the impact of this recently outbreak of Corona virus could be less severe compared with the severe acute respiratory syndrome (SARS) outbreak in 2003, as the Wuhan virus appears to be less contagious and less fatal. Tom Essaye, founder of Sevens Report Research, notes “From a market standpoint, since this disease is closely related to SARS, I think the market reaction to the SARS outbreak gives us a good template to follow,”
In simple terms then what is that “template” and how do we follow it? A fair question as by now some of you might be thinking “Yeah, but this time might be different”. It might also have been different after:
· It might have been different after the GFC.
· Or the dot.com crash.
· It might have been different after Brexit.
· It might have been different after Trump.
· Or December 2018, when stocks fell meaningfully just before Christmas.
And yet here we go again. There will be people lining up, this morning, to sell once the market opens, influenced by fear the headlines and the talking heads. “At least I did something” they’ll tell themselves. Not like those suckers who held on while their portfolios fell, and…
And?
As I pointed out earlier, I possess no crystal ball, nor a time machine. I can’t tell you what happens next, in either the short term or the long term. I’d be lying to you if I said I did. But there has been no time in history — EVER — when developed world stock markets have failed to scale their previous highs and go on to set new ones. There has been no time when adding money to the market, regularly, has been a bad idea (indeed, continuing to add during the depths of the GFC turned out to be incredibly lucrative).
I don’t know how the ASX will close today. I cannot say whether tomorrow will be better or worse. Your portfolio might be 2% lower — or higher — in a month’s time. What I do know is that history is, very strongly — on the side of the patient, long-term, dollar-cost-averaging investor. Markets tend to move violently on the back of 2 emotions: fear and greed. Warren Buffet, perhaps the world’s most famous investor has a theory on this and it is simple “be fearful when everyone else is being greedy and be greedy when everyone else is being fearful”.
Sure you could try and react to the daily headlines. Sell. Buy. Buy. Sell. Attempt to time the market for short term gain. Try to be smarter than the other guy. Just remember how that’s turned out… literally every other time.
Written by Glenn Barea
Reference: Yahoo Finance, Motley Fool.