Fear is often the immediate response to uncertainty
“Fear is often the immediate response to uncertainty. There’s nothing wrong with fear. The key is to not get stuck in it.” Gabrielle Bernstein
Nearly three months since reported, COVID-19 continues spreading fear at a pace seemingly faster than its infection. In attachment are some facts on the virus. Fear is a common human emotion and we have bouts of fear nearly daily. Fear is autonomic, an involuntary response to stimuli. There is an immediate response to fear and a longer developing response to fear. We have all been on an airplane ride when the plane hits the first bout of turbulence and our heart drops to our stomach and heartbeat spikes to 150 beats per minute. That is our initial response to fear as for that split second our reaction is, “OMG, we are going down!” However, our longer developing response to fear is more thoughtful and incorporates more data points to come to our conclusion. Here we remember that the ‘fasten your seatbelt sign’ came on and the pilot announced a rough patch of weather ahead. We settle ourselves and our heartbeat declines.
Don’t let the media hysteria derail your long-term plan. I often view the stock market news and media outlets as Chicken Little yelling from the town bell tower saying, “Mayday! Code red! Run for cover, the sky is falling!” after an acorn hit him in the head. After all, who would watch the news if there wasn’t that aspect of drama, right? Diversified portfolios are crafted with a long-term view and incorporates a long-term valuation of stocks. In the short-term, it truly is very difficult to predict the direction of stocks and if someone claims to know the path with a high amount of certainty you should take it with a grain of salt. However, in the long-term (> 10 years) stocks have displayed resiliency even through the roughest patches in U.S. history, and the standard error (a measure of volatility) of compound returns drop significantly. Lastly, a diversified portfolio also includes some bond or fixed income component, which have a more predictable range of returns and standard error of compound returns that drops notably in a shorter-term holding period. This acts as the portfolio ballast in the periods of short-term volatility as we have experienced over the recent two weeks.
It seems to be human nature to pass on chaos-related gossip. It happens daily. “Hey, did you see that car crash?” Or, to all the baseball fans “Wow, have you seen all the Astros players getting beaned in spring training?” As serious as the Coronavirus is, I think we can get enamored by the urge to pass on the gossip; incremental or not.
In summary, the economic impact of COVID-19 will be notable. The supply chain impact from China alone should shave off a notable amount of first quarter GDP. However, the selling over the recent week has seemed overdone and exacerbated by fear. We don’t know where the market bottom will be, nor will we attempt to sell long term positions with the goal of buying them in the future when, I hear this often, “things are better”. History has shown three things; The stock market, often, recovers before “things are better”. Secondly, the best days in the market usually follow the worst days, also known as ‘volatility clustering’. Thirdly, if you miss just a small percentage of the best days in the market, your return is drastically reduced. If at any time you feel uneasy about the markets, please give us a call.
Thank you for your trust and confidence in managing your wealth.
Cory Michael Nakamura, CFA, CFP®, PPC® Chief Investment Strategist