Coronavirus Market Correction/Selloff

Investors are panicking due to the spread of the COVID-19 virus. It’s been possibly the fastest 25%+ decline off a stock market peak in history! Is the selling done? Nobody knows. What do a lot of investors do in the face of corrections? They sell…

Well, it’s understandable, it stops the pain. You first feel better because in the short-term you may guess correctly and the market continues to fall. Then the markets recover, as they always do, and the result is inevitable: Huge portfolio under-performance.

Here is one of the most important things I learned in my career as an investment professional: the smartest thing to do during periods of market turmoil may be to do nothing. During the heights of the financial crisis Jack Bogle said:

Don’t just do something, stand there! – Jack Bogle

For many reasons which deserve their own article, I subscribe to a disciplined value approach which forces buying after prices move down and selling after prices move up. However, for most investors holding well diversified stock portfolios, doing nothing may be the smartest thing they can do during market turmoil. Even during other really scary periods like the crash of 1987, the Long Term Capital Management / Russian Ruble crisis of 1998, the .com bubble bursting in 2000, and the financial crisis of 2008–2009, staying the course paid off.

Actually, even better than staying the course I would:

add to equities when equities are sharply down.

Why investors behave this way

There are distinct behavioral traps, psychological traps, triggers and misconceptions that cause investors to act irrationally. Fear, greed, etc. Regardless of what the underlying emotions are that trigger the irrational behavior of buying after stocks have gone up in value and selling after they have gone down in value, the important thing for all of us is to identify this pattern and try to get ahead of it.

Of course we do not want everybody to now become rational investors, we just want our clients, with our help, to behave rationally. We do want other investors / market participants to continue to act irrationally to create inefficiencies and opportunities for us, the rational disciplined value investors, to buy low and sell high!

Most corrections appear to have really good reasons for happening when they do. The negative messages are repeated constantly by the media and they become more real every day as this repetition makes these reasons sink in and we tend to forget all the positives that usually exist at the same time. The result tends to be an over-reaction to whatever the actual reason du jour is. In our case now COVID-19 plus the oil price war between Saudi Arabia and Russia.

Why this time it is not different

Here are some reasons why this latest Corona and oil induced correction will not be different:

  • The most likely scenario is a few month severe slowdown in economic activity followed by a sharp recovery.
  • Saudi leader MbS and Putin could co-operate and agree to cut production. An oil price rebound could help.
  • The VIX (the volatility index on the S&P500) is currently over 70 as I am writing this, and it always “reverts to the mean”. The average for the VIX is around 20. Markets eventually calm down, even after wars, terrorist attacks, natural disasters, etc.

Warren Buffett has said:

A climate of fear is investors’ best friend. Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance. – Warren Buffett

In conclusion:

Work with an investment advisor, establish the right asset allocation for you, and stick to it during both good times and bad!

Our clients have well diversified portfolios that include private equity, private credit and mortgages, gold, etc. This fast correction highlights the absolute need to not rely too heavily on the stock market for your income and growth needs. It’s never too late to take your investing game to the next level. Contact us, we’d be happy to help you.

Constantine Lycos
Latest posts by Constantine Lycos (see all)
Call Now