Thoughts on Recent Market Volatility


Following is a message from CRA’s investment advisor, Innovest Portfolio Solutions, regarding recent market events.

The World Health Organization has now declared the coronavirus a global health emergency, and in the United States we have deemed it a public health emergency. We remain hopeful that global health authorities can contain the outbreak, but we also acknowledge that no one knows with certainty how it will play out or how extensively it will eventually spread. Our thoughts are with those infected and affected, particularly with the families of victims who may succumb to the virus and with those battling diligently to contain the disease. Our confidence is bolstered by the prospect of global cooperation and the news that researchers are already racing to develop a vaccine so quickly after the virus first emerged.

Amidst that uncertainty, it now seems likely the coronavirus will have a large negative shorter-term impact on China’s economy, with spillover effects on other countries with closer economic and trade ties to the region. Historically, the economic impact of events like this has been relatively short-lived and followed by a make-up period of above-normal growth. That history tells us that it is unlikely to have a lasting, long-term effect on the global economy.

Based on what we think are the most likely outcomes — acknowledging that there is still a great deal that is unknown — we do not believe this event changes our longer-term scenarios or the key underlying assumptions for our five- to ten-year expected return estimates for stocks and bonds. We believe the appropriate, disciplined response is rebalancing portfolios.

Portfolios are best constructed not under the assumption that nothing bad ever happens in and around the markets; in fact, the reverse is true: markets are bound by a degree of uncertainty. Investors don’t need to predict what they will be or precisely when they will hit, but in building portfolio exposures, it is important to account for potential (and, indeed, likely) unpleasant, unexpected, impossible-to-time market-shaking events.

What we do know for sure is that panicking or overreacting to news headlines is never a good investment approach. There are always uncertainties and external shocks that can hit financial markets, often at unexpected times. By remaining invested appropriately for your risk tolerance, investment objectives, time horizon, and financial goals, recent events — or any short-term market shock — should not change anything.

We don’t believe investors can be successful in jumping in and out of markets in response to short-term news. If one were to sell equities now in response to the coronavirus, what is the signal, the investment discipline, to “get back in”? Just as the markets are discounting the incremental negative news on coronavirus (i.e., prices are falling), they will also be discounting good news as it comes out and prices will rise.

Getting in and out of markets requires making two good timing decisions: the exit point and the re-entry point. Timing one correctly would be fortuitous, getting both right nearly impossible. Well-documented natural human behavioral and emotional biases that work against long-term investment success. Remember, as Warren Buffett famously said, “Be fearful when others are greedy, and greedy when they are fearful.” Put another way: “Buy fear, sell greed.”

Again, we believe the appropriate response to the recent market volatility is rebalancing portfolios.

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