Reaction to COVID-19's impact on Portfolios

As we enter another week of craziness with the Corona virus rampant around the world, we can hardly help ourselves from feeling anxious and even helpless at times.

As we enter another week of craziness with the Corona virus rampant around the world, we can hardly help ourselves from feeling anxious and even helpless at times.

The unknown is always scary!

A couple of weeks back, I was listening to a psychologist on CNN speaking about the response in the States of various governors and explaining why there is a misalignment between the protocols that the various states have decided to follow, and the federal government themselves – there seem to be so many differing opinions as to the best actions to follow. This highlights how we each go through a similar emotional process and may come out with varying reactions. 

I couldn’t help myself from comparing this to how most people think of their funds and financial planning during times of crisis. The key here is to respond well and not to react emotionally.

In my view, we all go through 3 distinct stages:

Stage 1 – Fear & Panic

It is 100% normal for us to be fearful in times like this. None of us really know what the impact of the virus will be on our lives either from a health or financial perspective. 

Will the economy be in recession or even depression and if so for how long?

How much lower can the markets go?

Will I lose my job?

What will things look like after the recovery?

The fear comes from the fact that there is uncertainty around these questions and none of us have precise answers.

The irony is that we can take comfort from the fact that the world has gone through so many events that have been unprecedented before and while in the midst of them, the same feeling of anxiety presented in most of us. Two of the most recent world events were 9/11 and the credit crisis.  I know that you will say these were entirely different and you are right. The nature of these events is that while they are all different as far as the cause and immediate impact, they are often similar with regards to the end outcome

Every challenge over the years that markets have been exposed to has been followed by a rebound with markets obtaining new highs post the event.  There really is no reason to believe that this time will be any different.

Stage 2 – Feeling the Need to Do Something

Once we move past the initial paralysis that is caused by the fear and panic from stage 1, we usually have an overwhelming feeling that we need to act and DO something about our situation. We want to be in control!

Moving past the initial anxiety and first stage is a good thing but we need to tread carefully.

We often have a feeling of if I don’t act then I am giving up and things won’t get better by themselves.

The danger with this emotion is that all to often, it leads to the wrong decisions and often leads to action for the sake of action.

Stage 3 – What actions should I take?

The diagram below is one of my favourite diagrams and I often use it to illustrate the point of understanding which behaviours are useful.

When we get to the point of wanting to act, it is important to realize that there are many things beyond our control and to try and affect those would not only be useless, but also frustrating. We cannot control market movements or the time for recovery and trying to jump in and out of investments is totally counterproductive.

We CAN control things like our long-term planning and structure of portfolios. A well-constructed portfolio deals with the good and the bad and recovers from events such as this.

Sometimes making no changes is a good and deliberate action that can go a long way towards improving things in the long term.

If you would like to discuss this or any other issues around your personal finance, give me a call on (02) 8821 7090.

© Martin Morris

In conclusion, when it comes to our investments, we should be asking ourselves:

  1. Do we have a long-term horizon?
  2. Are we properly diversified?
  3. Is the level of risk that we are taking appropriate?
  4. Are our expectations realistic?

If the answer to the above is YES, then very probably no action is the best action!

As a client of mine, I believe that the answer to the questions above is a resounding YES.

Please feel free to get in touch if you need some reassurance or to discuss your unique portfolio and circumstances. You can reach me on (02) 8821 7090

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