What Do We Really Know?

Following last week’s extreme plunge, and a weekend of reading and watching the latest developments, hype and prognostications, I have the need to ground myself in objective reality—something that I know works, and is reliable. Anything.

The coronavirus (scientific name COVD-19) is real and known. The depth and duration of the fallout from the virus at all levels, including its impact on the financial markets, currently is unknown, and in my opinion, unknowable.  We won’t know what we know until the crisis has passed.

The history of markets contains many truths—clichés that generally offer solid advice. One is that the markets ultimately will recover from all declines – eventually. Indeed, a great deal of financial heartache has followed the phrase: “this time is different.” Is the impact from the coronavirus really different? How long is “eventually?” Currently, these are questions without answers.

So rather than hypothesize on that which I’m acknowledging is “unknowable,” namely how the markets will react during the next few days and months, I’ll fall back on a few of the tenets that have worked for me as an investor, and one who advises on investments. 

Adjusting one’s portfolio to rebalance into asset classes that have declined is smart. Adjusting one’s asset allocation to reflect changes in long-term financial objectives, and evolving risk tolerances, always is appropriate. Going into cash out of fear, with the intention of coming back into equities at better valuations isn’t a strategy – it’s the definition of market timing, which rarely works out well.  

In December, 2018, reflecting on a truly dismal fourth quarter, I wrote on the risks of leaving the markets for the safety of cash: “Investing: Don’t Be Your Own Worst Enemy.” In that article I posited that going to cash is the easy part; choosing the reentry point is much more difficult, and rarely feels safe. After you exit markets, subsequent upticks are viewed with suspicion, while further market declines serve to reinforce your decision. As I’ve said before in this space, “Very few nail either exit or reentry points correctly with consistency.”  Historically, sitting tight and riding out the vicissitudes of a market that has turned ugly has been the best strategy.

I’m an unapologetic asset allocator and I have been recommending that clients not change their asset allocations based on current headlines – regardless of how unnerving. Smart investing requires discipline and the confidence that over time the financial markets will right themselves – and you’ll still be invested to benefit from the recovery.  

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