Don't Let Fear Drive Your Investment Decisions

Don’t Let Fear Drive Your Investment Decisions     PDF View

“Fear is the foe of the faddist, but the friend of the fundamentalist.” – Warren Buffet

We wrote an article just last week about the Coronavirus and how pandemics over the past 100 years or so have tended to affect (or not affect) investment portfolios.   As equity markets have continued to fall since that writing many investors continue to raise concerns about their portfolios.  These concerns are perfectly legitimate and understandable.  You, as an investor have worked hard to put away hard earned savings, and you wisely wish to protect it.  But before doing anything rash, like selling out of your well designed investment portfolio and going to cash, let’s once again consider some facts.

Let’s start with how the equity market is doing.  Please note that for a lot of this discussion we will refer to the S&P500.

On February 19, 2020, the S&P 500 hit its most recent peak:  3386.15 at the close of business for the day.  As concerns over the spread of Coronavirus continue, there is also a developing concern about how it will affect global trade.   On February 28th, the S&P 500 dropped to a low of 2954.22, a decline of 12.76% from the February 19^th peak.  In Canada, the S&P/TSX peaked on February 20^th at 17,944.10, only to decline to 16,263.10 on February 28th, a drop of 9.37%.  It was a tough week. (Source:  https://finance.yahoo.com/quote/%5EGSPC/history/, and https://ca.finance.yahoo.com/quote/%5EGSPTSE/history?p=%5EGSPTSE)

The question is then, could things get worse?  Yes, they could.  They have before, so certainly they could again.  To gain some perspective, let’s look at some recent history.  Again we’ll use the S&P 500.

Source:  https://finance.yahoo.com/quote/%5EGSPC/history/

You can see from the above table, that what we’ve experienced over the last week of February 2020 is really no different than any one of several other market declines that have occurred over the last 10 years.  Having said that, this same decline did occur over a very short period of time (just one week), so what do we make of that?  What if we’re actually entering a bear market, with the Coronavirus being the catalyst? 

Bear Markets

Officially, ‘bear market’ is a term used to describe a decline of 20% or more in multiple broad market indexes like the S&P/TSX, the Dow Jones Industrial Average, or the S&P 500 over a period of two months or more.  In the table below, we’ll look at bear markets that have occurred on the S&P500 going back as far as the 1970s. 

Source:  https://finance.yahoo.com/quote/%5EGSPC/history/

These numbers are a little more significant aren’t they?  On one hand, hopefully they help to put more recent events into perspective (i.e. the declines to date aren’t particularly significant).  On the other hand, could these market declines happen again?  The answer is, yes they could, and we have no way of knowing the timing of them, or what the catalyst could be.  If you are retired or nearing retirement, it is likely that this is an experience you’d rather not take part in; however, there’s good reason to pause and then stay the course.  As Franklin D. Roosevelt famously said, we have “Nothing to fear, but fear itself.”

Let’s take the bear market table we were just looking at and then add to it the recovery period after the decline.

Source:  https://finance.yahoo.com/quote/%5EGSPC/history/

As you can see, each of the bear market periods is followed by a significant recovery period.  If you cashed out of your portfolio on the way down, not only would you have crystalized those declines, but you would have missed the timing when the market turned around and potentially have missed out on a massive amount of growth in your investments.  Remember it is very difficult to time the markets in terms of getting in and out of stocks.  You ultimately have two decisions to make.  When to get out, and then when to get back in again.  How many investors do you think were jumping into equities on March 9, 2009?  Not many.   We remember.  And yet, that was arguably one of the best investment opportunities of a lifetime.

Back to the Coronavirus

In our last article we spoke about the number of people that are being impacted by the Coronavirus and we wrote a lot about China (where the virus was first discovered).  Since that time it’s hard not to notice the panic that seems to be seizing citizens all over the world.  You just have to look at the media’s pictures of Costco shelves being cleaned out to realize there is real fear out there.

And yet, it would appear that cases of new Coronavirus infection in China are actually on the decline.  To date, there have been over 3,000 deaths globally.  In the US, as of this writing, there have been six.  Canada has still only experienced a handful of cases and no deaths.  None of these numbers appear particularly significant when you consider the impact of the annual flu season and statistical death rates in general.   Looking at the US for a moment, as of 2020, the US population is 331 million and they have an average death rate of 8.88 for every 1000 people.  This means that over 8000 people die every day in the United States.  29 million Americans have already had the flu this year and sadly 16,000 of those people have died. Of note, in Canada in any given year, the flu typically causes 12,200 hospitalizations and 3500 deaths.

(Sources:  https://www.worldometers.info/world-population/us-population/, https://www.macrotrends.net/countries/USA/united-states/death-rate, https://www.marketwatch.com/story/as-the-world-focuses-on-coronavirus-dont-forget-about-the-deadly-flu-2020-02-06,  https://www.ontario.ca/page/flu-facts)

The point of this is not to make light of the virus.  Being diligent with your health, handwashing, staying home when you’re sick, or simply being cautious in public, especially if you are an individual who could be at a higher risk from a respiratory illness simply makes common sense.  Our concern is that investors translate their worry about this virus over to their investment portfolio and take, what we might consider to be unnecessary precautions.  

Conclusion

We wanted to focus on the numbers at the start of this article so that you would have a clearer picture about levels of volatility and market declines that are the normal part of investing in equities.  To enjoy the higher returns that equity investing offers, one must go through certain periods of decline.  We are going through one of those right now, although there’s no indication that this will become a bear market yet.  It still might of course, but armed with this new information, we hope that you feel much better prepared to meet the battle head on.

And with that, we’ll leave you with one more quote from Berkshire Hathaway’s Warren Buffet:

“Be fearful when others are greedy and greedy when others are fearful.”

If you’d like to discuss this topic further or if you’d like us to perform a review of your portfolio in addition to your goals and objectives, please call us at (780) 426-2400, or e-mail us at gkoss@stroudagencies.com to schedule an appointment.