The Coronavirus is consuming the news lately! The market down a thousand points, up several hundred, down a thousand! It’s hard to keep up!
So what should investors be doing with their finances and retirement right now?
In this webinar I shed some light on the Coronavirus, put it in a historical perspective, and discuss the things you should—AND SHOULD NOT—be doing right now!
I’m also the host of the RetireWire podcast video blog series. I wanted to jump out ahead of this Coronavirus madness before it gets any crazier than it already is. I don’t want to downplay it. I don’t want to say that I can predict the future.
I’m not a doctor, but there are some things that I’d like to share with you to put this into more of a historical perspective, but as well to get you thinking in terms of is there anything that I should be doing right now, or should I do nothing? Those are some of the things that we’re gonna wrestle with today and cover for you.
Today we’re going to be discussing the Coronavirus craziness and what you can do to stay safe and hopefully plan and protect your portfolio and your retirement plan.
So let’s start with what is the Coronavirus because I see a lot of these news stories where people are not buying Corona beer anymore. They think it has something to do with Corona beer and obviously that’s not the case.
Let’s just talk real quickly about what it is to put everything in the right framework. Coronavirus is also known as COVID-19. It was discovered on the last day of 2019.
It’s a new strain of the virus that we’ve seen before and it basically is something along the lines of a cold to something more serious, but it’s nothing crazy new. It is also related to SARS (severe acute respiratory syndrome) and MERS (Middle East respiratory syndrome). So we’ve seen this type of thing before and it’s not completely foreign to us.
The Coronavirus originated in Wuhan, China as you probably heard a lot on the news lately. The symptoms that you may experience are fever, cough, and pneumonia. I’ve heard it described as a bronchitis type and other respiratory problems. It can get worse. It can lead to kidney failure, it can lead to death. We’ll discuss that as well.
The symptoms typically show up from two to 14 days and sometimes you don’t have any symptoms. Sometimes even people who have Coronavirus don’t even know that they’re sick.
So, why the worry? What’s the big deal with the markets and so forth?
Well, the Coronavirus can be deadly. Although, so can the flu.
Experts are claiming the Coronavirus has about a 2% mortality rate. It’s very, very likely, much less than 2%, as many of the early cases likely weren’t reported.
There’s also a lot of cases where people thought they had the flu, didn’t go to the doctor and didn’t get tested. They recovered and kicked it, so if you think about it, only the really sick are going to self-report.
And so this thing kinda popped up very quickly out of nowhere.
Some of the worry is around the fact that it does spread more quickly than SARS did and other similar viruses and it’s unknown whether it can be spread if you’re not showing symptoms, meaning, that there could be carriers.
I could have it right now and I could, you know, go give it to somebody else. I might not have any symptoms. So that’s unknown which is why it’s creating that fear, that worry, that anxiety because we don’t know these things.
Typically older people who have other health issues are the ones that are most affected in terms of how bad their symptoms are, and the mortality rate also is much higher among older people as well. Also, men are at a higher mortality risk.
So those are things that you need to be aware of in terms of why are we worried about the coronavirus. If you’re less healthy, you’re more likely to be affected. Those with diabetes and high blood pressure are at a higher risk.
So, what are we dealing with now? Let’s talk about the actual stats.
There have been about 3,000 deaths worldwide and approximately 88,000 cases. Experts are saying there’s around a 2% mortality rate.
Obviously that number is a little bit higher, but I think that goes into the fact that a lot of people have already kicked this and recovered. So is the mortality rate really 2%? I don’t believe it is.
Some things that you can do to keep yourself safe…basically just stay calm! That’s number one.
Don’t panic, don’t freak out. Make sure you wash your hands like crazy. Twenty seconds is what I’m hearing.
Don’t touch your face, nose, your eyes or ears. Stay away from people who might be sick and obviously cover your nose and your mouth when you’re sneezing in order to help slow the spread of this and maybe negate it.
Let’s talk about you and your money cause this is why you’re really here. So if we go back again, the Coronavirus was discovered on the last day of 2019. If you recall, it kinda meandered around in the news a little bit over the last couple of months since the start of the year, but it was never anything major up until these cases started piling up.
And it starts getting more pronounced in the economy. The stock market was at an all-time high which was around 29,500 almost 30,000 on the Dow Jones. That was February 12th and the economy is cruising along. Our market’s coming along, everything’s going great, and BOOM! All of a sudden Coronavirus craziness kicks in.
And since then we’ve had about a 4,000 point lop off on the Dow Jones. That’s about 14%, which is a big drop given how quickly it happened. You’ve seen this on the news and you’ve seen it on your accounts if you’ve logged in. So what that is, is we’re firmly into correction territory.
Actually, we’re almost into bear market territory. A bear market’s about a 20% drop or worse, and a correction is about a 10% drop. The reality is we have corrections all the time. This is nothing unusual. This one just happens to be labeled the Coronavirus correction.
So, there is really nothing on the surface to be too terribly worried about, this is normal.
Now keep in mind, the very first thing that we do to help reduce your risks and reduce the volatility in your portfolio and make sure that we can accomplish your financial plan, is we diversify. So we diversify not just into one stock. You’ll own all U.S. stocks and we won’t just own U.S. stocks, but we’ll own international stocks and emerging market stocks as well. So now we’re diversifying, diversifying, diversifying!
Most importantly, most of our clients, 99% of them have a fairly substantial amount into fixed income securities or bond investments. Now, what you may or may not know is that bond investments typically are non-correlative to stocks. They’re actually negatively correlated with equity investments or stocks, meaning that when stocks go down, bonds typically go up and vice versa.
So what we’ve seen with the bond market, the aggregate bond index was actually up 2%. Now bonds, again, they’re far less volatile. They’re not your stock investments they are your bond investments.
So your bonds have actually gone up 2%. If you were actually in a 50/50 portfolio, your portfolio would have dropped roughly 6%. So you made a couple points on the bonds, you lost 14 points on the stocks. And again, we’re using broad indexes. This would give you an overall portfolio return of, like I said, negative 6%.
But think in terms of your portfolio if you have a substantial amount of bonds and you lost 6%. It’s painful, but it’s not the same pain that you would have felt if you had 100% stock investments. So that’s number one. You’ve gotta put it in context of what is your portfolio, not just the stuff you see on the news.
Additionally, over that same period of time from February 12th through the 28th is we’ve got volatility that’s actually tripled. Volatility has spiked through the roof in a very, very short period of time. So this all adds to this fear and this worry and this anxiety.
But again, corrections are nothing new, a bear market is nothing new. I mean, one out of every four to five years you’re gonna have a nasty bear market, but you’re gonna have a correction every year or two.
So this correction is just labeled Coronavirus and maybe we’ll have more, maybe it’ll get worse, we will see.
Also, keep in mind that effectively all these last two to three weeks has done is it’s wiped out a year’s worth of gains. Now, I don’t mean to lighten that or to downplay it, but my point is we had a huge market run last year and so we’ve wiped out those gains.
It doesn’t mean that you didn’t get to keep the interest payments or the dividends from your mutual funds and your stock and bond investments because you did. You kept those dividends and you kept that interest. But in terms of just principle value, we’ve wiped out a year of gains, which is certainly no fun. But this is a normal part of investing.
Now why are the markets dropping like they have been? Well, number one, we’re worried about the supply chain.
Why Is The Stock Market Dropping?
So, if you think about this, I’m gonna go buy a piece of stereo equipment and I got a call from the guy I was gonna buy it from and he’s going to install it. And then tells me, “Hey, this thing is made in China, they’re not gonna make this. They shut down the plant.”
So now I can’t go buy that piece of stereo equipment. He can’t install it and his installers don’t make money. He doesn’t make money and I don’t get my stereo equipment.
So there’s a supply chain. And that’s going to filter its way throughout the global economy.
There are things that China produces, it’s a massive economy and some of those items may not come as fast and furious as they were. So that’s one of the big worries, which is going to lead to a slowing economy, which is the big fear.
We have a slower economy, we have less growth, less GDP and the markets aren’t doing as well.
With supply chain disruption people will be traveling less. I’ve already seen the ticket sales are down and so forth. So they’re not traveling, they’re not spending as much money, they’re not going to eat at the hotels or the restaurants. And so the bartenders and the bellboys, they don’t get to make their money.
So it all filters in like a ripple effect throughout the global economy. And since we don’t know what the outcome is, we cannot predict the future. I do have a crystal ball behind my desk, but I haven’t got it to work. But since we can’t predict the future, this leads to a lot of fear and a lot of uncertainty and a lot of anxiety.
And if you think about how stocks are priced, stocks are always perfectly priced because you take millions of people who want to buy a stock, millions of people who want to sell a stock, and they come to an agreement.
Stocks are always perfectly priced and they’re priced based on the expectations of what we know and what we expect in the future, and so when you’ve got stocks that are perfectly priced, there are more people who are fearful for the future.
So that drives the price down because there are fewer people to purchase that stock. It’s supply and demand just like anything else in a free-market society.
So what we’re saying or what I’m saying is the reason the market’s tanking is that there’s all these fears the economy is going to slow down and grind to a halt. Whatever you want to say just depends on how big you want to play up the Coronavirus and what spin you personally want to put on it, but I wanna put this into perspective because this is very, very important.
What About Other Outbreaks . . . How Did Investments Do?
I want to put this into perspective because this is very important. We’ve had five pretty big outbreaks since 2003. So first there was SARS with a 10% mortality rate, which is 5x more deadly than Coronavirus and much more likely to grind the global economy to a halt.
In the following 20 months (after SARS outbreak), the S&P was up 20%! Your investments did pretty darn good, right?
Okay, that sounds pretty good to me. If I said to you right now the S&P will be up 20% in a year you would be buying like crazy. You’d be putting money into your equities, you’d be increasing your equity allocation.
I’m not saying the market is gonna do 20% in the next 12 months. I’m just saying this is what happened with SARS.
If you look at bird flu, similar story, 18% market rebound, swine flu, 35%. Ebola had a 50% mortality rate and was up 10% the following 12 months. Zika virus, same story, 17%.
So these are all very similar numbers but what you can take away from this is we’ve seen this before. The same type of stuff and you can argue SARS was worse, you can say Ebola was worse. Whatever, we’ve seen it before. The market has soared in the following 12 months. Keep that in mind.
Also, keep in mind the 2018, 2019 flu season. There were 35 million people who got the flu and 34,000 of them actually died. So the much bigger issue is the flu. Now granted the mortality rate was much lower. In that flu season it was 0.1%, so a very minor mortality rate.
I imagine that if I was to research that even further, most of them would be people who were not as healthy and elderly.
This flu season, we’ve had 16,000 deaths and 29 million cases. So the mortality rate actually went quite a bit down this flu season.
I’m actually more worried about the flu this year than I am about Coronavirus, to be very candid. The numbers are much, much bigger, but we’ve been dealing with this for years and it doesn’t have this scary name, Coronavirus. So it’s not gonna make the news.
With the Coronavirus, so far, we’ve got less than a hundred cases here in the States and there are 88,000 or so worldwide. Also putting this into perspective, let’s talk about the drops we’ve seen.
How Did The Stock Market React With Other Things?
As of now, we’ve seen 14% lopped off the Dow, everything that we’ve made for the past 12 months, roughly speaking.
In 1987, on Black Monday, we had a drop that was actually 22% of the Dow. That was a 508 point drop.
The 508 points doesn’t sound scary anymore because we saw that for multiple weeks, but that was on a much lower Dow Jones and so that was a 22% drop, substantially worse than what we’ve seen so far.
I’m not saying it was related to any virus or anything like that, but just keep in mind we’ve seen these big types of drops before.
Also keep in mind this investment drop might not even be related to Coronavirus as much as it is the market being up 30% last year. The S&P was up about 30% and investors all over the place are just looking for any excuse to take some of those profits.
So maybe they’re not even worried about Coronavirus and maybe just, “Hey, I’m gonna take some money off the table and reduce my exposure because I already made so much last year.”
There are a lot of traders who do that.
As a global economy and as a United States economy, we have survived and thrived through all of these issues in the past. We’ve seen all those outbreaks. We survived world wars, recessions, depressions, inflation, corporate scandals, terrorist attacks, and epidemics.
We survived all of these things before and only three weeks ago, we were at all-time record highs on the Dow Jones and S&P 500. So let’s really take a step back and put this in perspective.
It’s really in the grand scheme of things, probably not as bad as it’s being portrayed. Let’s also talk about your behavior, my behavior, everybody’s behavior when it comes to your money.
How Your Behavior Affects Your Investments
I’ve heard this many times throughout my career. “Oh, well, you should have gotten me out before the drop”. Again, the crystal ball behind me, it doesn’t work and I’ve always said from 25 years of doing this, that the one thing you do have to be worried about is what you don’t know, which is what we call a Black Swan.
A Black Swan just comes out of nowhere. There’s no way you could have predicted it. There’s no way you could have ducked or dodged your way around it. There’s no way you could have navigated the news and predicted what was going to happen. So there’s nothing you could’ve done. There’s nothing that I could have done. It’s part of investing.
In fact, it’s the reason that investors get a higher rate of return on their stock market investments. You get that higher return with your stock market investments because you have the volatility, and the volatility is the news stories, world events, and epidemics.
This is a Black Swan event. There was no way that anybody could have predicted it.
Dalbar is a quantitative research company. They do an analysis of investor behavior. They put out a study every year and no matter how you look at the numbers, they’re always the same.
It just depends on what year you’re looking at or what index you’re looking at. And if you look at the 10-year stock investor return, their (the average stock market investor) return was about 9.6%. If You look at the 10-year S&P 500 return, that return was about 13%.
So you got about a third more by just owning the S&P 500 with blinders on. Put it in a shoebox and forget about it. And this is because people tend to make bad decisions at times like this. They tend to say it’s gonna get worse. I’m scared to death, let’s sell out of equities or let’s lighten up. It’s the opposite of what you should be doing!
So this is something that I want to drive home. The numbers are always very similar in terms of what the index returns versus what the investor actually experiences as a return. And that’s because investors always think they want to do something to stop the pain and to stop the bleeding. It’s just not a good strategy to have.
And we certainly don’t believe in that strategy. Also keep in mind, and if you’re not a client of ours, I hope that you still have a good comprehensive retirement plan in place. I’m talking about:
- Where are you now?
- When do you want to retire?
- How much will you need to retire?
- What are you going to spend?
- How is that money going to get through your plan and make sure that you don’t die broke?
It’s critical that you have a comprehensive financial plan. All of our plans include this market volatility because we already expect it. So if you’re working with Redrock and you’re working with Jeremy or myself, your plan already includes this.
So keep that in mind before you get too concerned, before you panic and freak out.
Fortunately, I am very proud to say that our clients are probably the most knowledgeable and educated because we’ve had maybe one or two questions on the Coronavirus. There’s been very minimal concern or fear among our clients.
I’m not trying to downplay that and I’m not trying to say that you haven’t had that concern and anxiety.
I’m just saying that we’ve had very few people that have actually reached out to share that with us. Frankly, that’s kind of the way it has been with Redrock since I started the firm in ’05. We’ve always had grounded clients. I believe that comes back to the planning process. If we didn’t have that planning process in place, then clients wouldn’t be half as grounded.
We also, especially for our retirement planning clients, include a strategy called a bear bucket and a bear slider. Simply, we have separate chunks of money that are in very safe, inflation protected instruments.
We know you need retirement income, but when the market does go into bear territory, we’re not going to send them distributions from their investment portfolio. We’re going to be sending it from that bear bucket because we want to be buying stocks, we want to be rebalancing into stocks, not selling them.
Regarding a bear slider, we make a conscious decision to update your investment policy to say we refuse to sell stocks at these low prices. We will only sell bonds because we know eventually that the market and the economy will return.
What does that mean for the average retiree and their retirement plan? It means that we will only be selling your bonds, and we would be typically buying and rebalancing into your equity investments. For most people, when you do the math, it takes your stock allocation up about 1% a month for most retirees on a distribution plan.
So, if you and I were to look back through history and say, when did you want to be a buyer of the stock market?
Well, the answer is EVERY TIME because you can’t predict the future other than we know it’s gonna be higher in 10-20 years from now. I would argue that you would very likely say that you wish you would’ve bought in ’08, I wish I would have bought in ’01, I wish I would’ve bought in 2000.
I wish I would’ve bought when the market was beaten down because of some crazy news like this!
And again, I’m not trying to downplay the Coronavirus, but this is very much in the news and it scares people. Now another way to buy in is to basically say, “I’m not going to sell my stocks. I’m going to rebalance my portfolio and I’m going to sell the fixed income. I’m going to keep my stocks and maybe buy some more”. And that will actually increase your allocation.
If you’re a 60% stock, 40% bond investor and every month that goes by maybe you’re 61% stock the next month and 62% stock the next month because you’re taking out the distributions. That to me is a beautiful strategy. I want to be buying into these investments as they drop like this. So keep that in mind.
And finally, I said this before in a different way, if you wish away the risk, you’re gonna wish away the return.
You cannot have one independent of the other. More risk, more return, less risk, less return.
But the point is you have to have this volatility in your portfolio to some extent. Otherwise, you can’t get the returns over long periods of time that will accomplish your retirement planning goals.
To wish away the risk is to wish away the return.
Now, how can we make money off of this? The very first thing again is the companies that you own in your portfolio haven’t changed in the last four weeks and they are no different.
McDonald’s is still selling burgers and Coke still selling Cokes. If the economy were to grind to a halt, maybe they would sell fewer, that’s possible, but then we would rebuild over time.
You saw the numbers from the five previous outbreaks. You get a substantial return after these outbreaks. Remember, nothing’s really changed.
Rebalancing. This is the fun part. Jeremy did all the rebalancing this morning because we look at this every month, whether you know it or not.
I’m proud to report that we had all buy trades and no sells of stock! This means that we’re buying more stock for you cheaper than we would have done a few weeks back.
I’m excited about this because what we put in practice here is forcing you to buy equities cheaper. Now we’re only talking about small chunks of your portfolio, but it’s doing the right thing and it’s doing it consistently.
Another thing that you may want to do is review your plan with us. Give us a call and you might want to increase your stock allocation.
If you’re 65% stock, perhaps it makes more sense to be 75%. If you’re 55%, maybe it’s time to go 65%.
Small changes like this can have a nice positive impact over the next 10 and 20 years of your life. But it’s very, very critical that we do this in the context of your retirement plan, because your financial and retirement plan comes first and foremost!
Remember, if you try and time the market, then you have to be right twice!
If you’re gonna get out of the market because you’re scared, then you have to be right about when you get back in. I’ve been doing this for 25 years and I promise you that people just don’t get back in until it’s too late.
Let’s talk about the bright side. I mentioned the mortality rate is probably much less than the 2%. There’s almost 37,000 people who’ve already had Coronavirus and they kicked it and are healed.
Could they get it again? Yes, sure.
But when you think about all the people that have already gone through it and they’re fine now that’s gonna reduce the mortality as well because those cases I don’t believe are tagged onto that 88,000. But it’s just food for thought.
In summation, a lot of people have already recovered from it. In fact, it’s interesting to me having seen multiple people who have it on the news and they’re reporting no symptoms at all. So the truth is instead of 88,000 cases, it might be 500,000 cases. But people just don’t go in ’cause they think it’s bronchitis or the flu or whatever. And then they ended up healing quickly. So the mortality rate is probably much, much lower.
I’m not going get into a political rant at all, but because I am a capitalist, which doesn’t neatly fall into any party, I will tell you that without capitalism we would not be having these vaccines so quickly.
Companies like Pfizer, Merck, and the big pharmaceuticals want to make money off of this and they want to hopefully do the right thing and help people get well. I’m very appreciative of their capitalist nature to rush out and try to create vaccines. I don’t believe this would be the case at all without a free-market society.
Finally, deep breaths! We’re gonna relax and not panic.
Keep safe, wash your hands. The craziness is already built into your financial plan. We just have to deal with it and manage it as best as possible in the context of what you want do with your finances for the rest of your life.
Any action that you would take right now would be nothing more than a guess, and it would almost certainty result in a negative outcome and any positive result that you might have would be nothing more than luck.
You can’t predict the future. I can’t predict the future and this too shall pass. We’ve overcome World Wars, depressions, terrorist attacks and other Black Swan events. They come, they go, they will not stop. There’s always going to be something to worry about.
I don’t want to put you into a false sense of security that everything’s gonna be rosy. This could get much worse before it gets better. We don’t know that.
But at the end of the day, put it in the context of what’s happened to the other outbreaks and the following 12 months.
Put it in the context of these point drops that could be a lot of profit-taking as well.
Put it in the context of the flu is, actually to me, much more worrisome this year than Coronavirus just because of the sheer number of cases.
And unfortunately we’re not really talking about that right now. We’re talking about the Coronavirus. So keep all of those things in mind.
Frequently Asked Questions
The Coronavirus cannot directly affect your investments, it’s the fear and uncertainly among both buyers and sellers of stocks that cause the volatility. The best course of action is to invest for the long term as our stock market has survived and thrived through many other global health concerns.