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The coronavirus and your investments: What you need to know

Something so unknown can be extremely difficult to stomach as an investor, especially with the scary headlines


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There isn’t day that goes by now that you don’t hear about the continuing spread of the coronavirus and the markets, of course, are reacting to this bad news. As an investor, what are you supposed to do? Sell everything and park your cash in treasury bills or ride things out and hope things get better soon?

The reality is, coronavirus came out of nowhere, and is what I would call a black swan event, meaning nobody could have predicted this; similar to seeing a black swan, which is an extremely rare and unexplainable occurrence.

The coronavirus (known formally as COVID-19) has now spread to other countries outside of China, and reports of people being sick in the Middle East and Europe are becoming the norm. If you compare this virus to the SARS outbreak in 2003, which infected 8,000 people, killed almost 800 people and spread to 28 countries, the coronavirus is already much worse. There have been over 3,000 deaths so far and over 90,000 cases reported globally.

The reason the markets care about the virus, despite the human tragedy of it, is because of the potentially long-term deleterious effect on global growth. If the virus continues to spread around the globe, it will have a major impact on travel and trade. The industries most impacted in the short run will be airlines, semiconductors, casino operators and cruise lines. Recently, large U.S. companies that do a lot of business in China, such as Apple and Coca Cola, reported that their first quarter earnings will be lower because of the virus.

As health officials struggle to contain the virus, markets around the globe dropped 10% to 12% last week. Investors have sought refuge in U.S. Treasury bonds. The 10-year Treasury bond is at an historic low yield of 1.05%. The VIX, or volatility measure, has spiked above 40, when just a month ago it was under 13. When investors get nervous, the VIX goes up dramatically.

I suspect the markets will be on edge and remain very volatile until the number of cases stabilize or a vaccine goes into production. Something so unknown can be extremely difficult to stomach as an investor, especially with the scary headlines.

However, the stock market is the greatest discounting mechanism that I have ever seen in my 36 years of being in the financial business, and in the long term, the markets will eventually discount this tragedy, quantify the potential damage to global growth and look forward. This is when greed takes over and investors will look for opportunities to invest in potential industries or stocks that get oversold.

If you can’t stand the uncertainty of the coronavirus, or the volatility it is causing to the markets day to day, you should revisit your asset allocation and make sure you have enough bonds and cash to mitigate downside risks to any of the stocks you might own.

It is not easy being an investor, but it is time in the markets that you make you the most money, not timing the markets that counts. There will always be reasons to sell, and 12 years into this bull market and with the markets up so much in 2019, the coronavirus is giving investors a good excuse to take some profits.

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Fred Taylor

Fred Taylor is president and co-founder of Northstar Investment Advisors, LLC. The firm specializes in managing personalized investment portfolios for individuals, families, and retirees with a focus on income generation. He is a member of the Colorado Forum and also served as an economic advisor to Colorado Governor Bill Ritter from 2008 to 2010.

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