Market declines can occur when investors are forced to reassess expectations for the future. The expansion of the outbreak is causing worry among governments, companies, and individuals about the impact on the global economy. Apple announced recently that it expects revenue to take a hit from problems making and selling products in China. Australian officials have warned of a serious blow to the country’s economy. Airlines are preparing for the lasting toll it will take on travel. And these are just a few examples of how the impact of the coronavirus is being assessed.
The market is clearly responding to new information as it becomes known, but the market is pricing in unknowns, too. As risk increases during a time of heightened uncertainty, so do the returns investors demand for bearing that risk, which pushes prices lower. Our investing approach is based on the principle that prices are set to deliver positive future expected returns for holding risky assets.
We can’t tell you when things will turn or by how much, but our expectation is that bearing today’s risk will be compensated with positive expected returns. That’s been a lesson of past health crises, such as the Ebola and swine-flu outbreaks earlier this century, and of market disruptions, such as the global financial crisis of 2008–2009. Additionally, history has shown no reliable way to identify a market peak or bottom. These beliefs argue against making market moves based on fear or speculation, even as difficult and traumatic events transpire.
We consider the development of a long-term plan to be of paramount importance. Our wealth management process considers a wide range of possible outcomes, both good and bad, when helping a client establish an asset allocation and plan that they can stick with in a variety of conditions. Those preparations include the possibility, even the inevitability, of a downturn. We have also considered both your goals as well as your tolerance for risk. Unless one of those items has changed, we recommend sticking with your plan and maintaining discipline through these turbulent times.
Amid the anxiety that accompanies developments surrounding the coronavirus, decades of financial science and long-term investing principles remain a strong guide. And, if history is our guide, panic is unlikely to be the best response. Increased uncertainty frequently brings increased volatility, so in these times thoughtful asset allocations within the context of long-term financial plans are as important as ever.
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