The Coronavirus: Impact and Financial Preparation
On February 24, 2020, markets dropped by over 3% both in the US and overseas. Fears surrounding the coronavirus are on the minds of investors and have resulted in the current pullback in stock prices.
Advitica clients are not invested in 100% stock portfolios, so losses were mitigated due to the portfolio’s allocation. As is often the case when fear infuses the market, investors fled to assets that are considered safe: high quality (usually government) bonds. While stocks saw large losses for the day, our government bond funds were up about 0.68% for the Dimensional Intermediate Government Bond fund and 0.57% for the Inflation Protected Securities fund.
How Long Will This Last? Unfortunately, we do not know how long it will take to contain the virus or if this is even possible. The coronavirus’s spread has been slowed in China, but it appears to be very contagious and continues to jump to other countries. Containment will likely prove more problematic in countries without the ability to impose strict controls on their citizens. Additionally, while the mortality rate of 2 – 3% provides some reassurance regarding the lethalness of this infection, due to its contagiousness, the coronavirus could be more problematic in the weeks and months ahead.
What is Going to Happen? If efforts to contain the virus are not successful, it is easy to foresee continued losses for stocks as China, the largest global manufacturer, continues to experience disruptions to its supply chain. Additionally, as the virus spreads, travel will likely be restrained and consumers will probably buy fewer things (like iPhones, airplane tickets, and trips to Disneyland), further shrinking economic output. While much of the news looks troubling, it does appear that the rate of infection is slowing.
What Should We Do? In conversations and meetings with clients, I often stress the need to have cash to fund a whole year of withdrawals. This is even more so now. With stock valuations high and the air of this market bubble being tested by the sharp edge of the coronavirus, it is critical that if you have a cash need you have not prepared for, adjustments should be factored into your planning as soon as possible. This also suggests that having an adequate emergency fund is imperative. While it is often suggested that emergency funds should provide for 6 – 12 months of expenses, your personal circumstances may warrant a higher or lower amount.
As of February 24, 2020, the US market is only down about 1% for the year. For many, this is not yet a buying opportunity. However, I am watching portfolios and the market closely for a chance to purchase stocks at better prices. Additionally, market losses may present the opportunity to generate losses in taxable accounts, potentially lowering your tax bill. However, be careful. Tax losses alone are not a reason to do nothing and simply let losses go unchecked. All factors need to be considered to determine the best path forward.
The coronavirus is a serious threat to global health and the global economy. The effects could lead to many lives being lost and a temporary downturn that proves problematic throughout 2020. Thankfully, Advitica portfolios are built to weather market storms. While we cannot prevent losses, our portfolios have been carefully designed in consideration of client goals, risk tolerance, and to capture lower priced stocks, when they occur. My advice: be aware, be prepared, help those you can, and stay calm. If you want to talk about this further or need to make adjustments to your financial plan, please give me a call.
