Sit tight or time to react? The evidence is clear.
As of March 2, 2020, there are ~90,000 confirmed cases and ~3100 reported deaths (see map). The equity markets have “corrected,” dropping more than 10% last week alone. News channels are on a 24 hour cycle, showing average people panicking, stocking up on basic household and food items. It’s understandable that you may be wondering what to do in these times as well. It may be difficult to stay rational when we still don’t know how much the COVID-19 will disrupt our lives and for how long.
The Markets Are Working As Intended
At least when it comes to your investments, there is nothing to indicate that the markets have broken down. Right now, like they do daily, market participants are reacting to the news and latest information. Participants are driving all available news, information, and expectation into prices. When the outcome is still unknown, millions of participants can’t all agree, increasing the market volatility. This is normal. And it’s normal if this uncertainty gave you a bit of anxiety, as well.
Here’s What You Should Be Doing
Allowing emotions or opinions about short-term market conditions to impact your investment plan can lead to disappointing results. This is precisely the wrong time to react. For example, when a blizzard hits, the people who already own snow tires are usually happier than those venturing out into the cold. In the same way, it’s generally best to make decisions rationally during periods of low market volatility, rather than emotionally during market dips and swings.
We’re in the middle of a storm right now. When it comes to investing, it’s the long term climate that you should be focusing on, not on the short-term weather.
Of course, this is easier said than done. Our behavioral biases are counterproductive when it comes to investing; we tend to be our own worst enemy. However, if we look back at similar cases, the data show that markets always recover:
Hopefully this puts your mind at ease a bit. Your best bet is to stay in your seat, to remain disciplined with a globally diversified portfolio of low-management fee index funds or etfs.