March 6, 2020
Lately, you’d have to have been living by yourself in a cave on a deserted island to not have heard about the Coronavirus. You can’t turn on the TV or get online without hearing about it and all the speculation regarding what the ultimate impact of the virus will be. It’s encroaching on many of our everyday conversations with friends, family, and colleagues. Rightfully, much of the speculation is geared toward how widely the virus will spread and the amount of human suffering that will occur, including loss of life. More broadly, people are also expressing concern about the potential cascading effects, including how financial markets and the global economy will be affected.
You know, if we think about it, we can find parallels in our own lives. A few months back my oldest daughter, Maeve, came home for school break with a case of the flu in full swing. My wife, Jill, and I first thoughts went to worry and how ease to her discomfort. We called the doctor, ran to CVS for prescriptions, and moved as many creature comforts as we could into her old room. We were assured by the medical professionals that she was a healthy young woman, and while the next few days wouldn’t be pleasant for her, she would recover. As our emotional distress as parents eased, our pragmatic side kicked in.
In the days ahead our two youngest kids, twins Phoebe and Sophie, both had trips planned with extra-curricular groups through their school. Jill and I were planning our own getaway set to coincide with twins’ trips and Maeve’s return to school. We rigorously heeded the doctor’s advice about how to prevent the flu from spreading to the rest of the family. Regularly washing our hands, not touching our faces, and going so far as having the twins “face-time” Maeve from another room. Eventually, the evenings would find the entire family sitting around living room “face-timing” Maeve up in her room. As she recuperated, we knew she was getting better when she popped on the screen a couple nights later and said, “This is Maeve reporting from the bunker.”
Folks, I hope my personal experience doesn’t come off as trite, that is not my intent, particularly in regard to a potential global pandemic. What I hope to convey is despite our best planning, certain unexpected events occur in life and we must move through them. In the financial markets there is even a term for rare, unexpected occurrences called “Black Swan” events. After some market events, such as the housing crisis of 2008 and the “Black Monday” market crash of 1987, while they caught people off guard, we could go back through the data and “model” how and why they occurred. Black Swan events are so rare that they are more unpredictable and really can’t be “modeled” after the fact. We’ve all lived through them, including the 9/11 World Trade Center attacks and the 2011 earthquake, tsunami, and subsequent nuclear power plant disaster in Japan. All of these significantly affected global markets. One of them occurred barely a half mile from Wall Street and the other brought production to a temporary halt at some of Japan’s largest corporations including Toyota, Nissan, and Sony.
Coronavirus is the Black Swan event that we are dealing with right now with regard to our personal investments and retirement accounts. The essential problem is that we still don’t have much to go on in terms of predictability of how far it will spread and how long it will last. There are concerning details. It is apparent that the virus originated in China and they are bearing the brunt of the virus thus far. China’s enormous role in the global economy, particularly from a manufacturing standpoint, will have at least a considerable short-term impact. There are also concerns about how forthcoming the Chinese government is being in reporting the number of infections and deaths. We are already seeing cascading effects to the emergency medical supply companies, that while they are not based in China, they rely on Chinese concerns to manufacture their products. Anecdotal evidence is being shared that the Chinese government is seizing products such as infrared thermometers intended for export shipment and deploying them within their own country.
If the virus does substantially spread to Europe, North America, and South America it has the potential to impact a broad range of industries through things such as medicine shortages, production shortfalls, and near- term waylaying of international tourism.
The most compelling issue with any Black Swan event like a pandemic virus or natural disaster is the human suffering and unfortunate deaths, and we need to process those emotions and safeguard our own families and personal health. We also need to move through them with a pragmatic approach to how they will affect our material well-being going forward, including our financial health.
When it comes to our investment portfolios and retirement plans, the question surfaces…how do we respond?
Billionaire investor Warren Buffett in addressing the Coronavirus warned of making moves in the stock market based solely on daily headlines. “The real question is: ‘Has the 10-year or 20-year outlook for American businesses changed in the last 24 or 48 hours?’” the billionaire investor said on CNBC.
If you look at recent market history and how the markets have behaved after other virus outbreaks, it tends to reinforce Buffett’s long-term approach:
|Epidemic||Month end||6-month % S&P change||12-month % S&P change|
|Avian flu||June 2006||11.66||18.36|
|—Source: Dow Jones Market Data|
The bottom line is we need to do what we can to eliminate emotion in addressing our investments and retirement planning. We can attempt to predict short term financial markets, but often times accuracy is as reliant on intuition and luck as complex models. Black Swan events will continue to happen, and they are not beholden to sophisticated modeling. It doesn’t mean modeling is not an important tool, but it should not be used to the exclusion of common sense and simplicity.
Folks, now is a great time for you to sit back and reflect on your current system. Do you have one? Do you have a risk budget? What is it? Are you incorporating sound system principles and incorporating downside risk mitigation modeling into your system? If not, why not?
You see, while black swans can’t be predicted or modeled, we can still take steps to lessen their impact on our investments and retirement accounts. It requires a sustained adherence to portfolio review, diversification, managing downside risk, and using rules-based adjustments that are based on quantative data . . . not emotion. Being able to exactly predict the future is virtually impossible but preparing for it is well within our control.
And no, I did not write this from my “bunker.”
So as always – be vigilant and stay alert, because you deserve more!
Have a great week.
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, Mansfield & Southlake, TX. Jeff can be reached at firstname.lastname@example.org.
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