The Coronavirus: 5 Important Investment Lessons Learned From Past Epidemics

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Updated: 12 March 2020

The coronavirus, as reported through the eyes of the world media, has people in a state of fear. It certainly is not pleasant what we are seeing and reading, particularly as the virus has now crossed borders and has become a global issue.

However, when it comes to your finances, the question you have to ask yourself is how should that fear be translated into how you manage your investment portfolio?

Panic often sets in causing us to make knee-jerk reactions that you are likely to regret when the dust settles and the news moves away from reporting on the virus and settles on a new hot topic.

The answer to the above question boils down to financial literacy and understanding how best to react to not just the coronavirus but ALL global events – political, economical, financial or health-related – as a private investor.

Often many of these events simply get absorbed into the markets with little impact, such as elections which are often made to be a bigger deal than they really are, but freak events such as the coronavirus will and do have a significant impact.

However, good financial literacy will help determine if the impact is short-term or long-term allowing you to position yourself accordingly.

The reality is that declines, also known as pullbacks or corrections, are a natural feature of the markets. Price must come down first for it to go further up. For seasoned investors, this time of year is synonymous with declines in the market, declines which are slow and unremarkable and well-managed. They also offer opportunities for those that know what we are looking for.

However, it is the speed at which the stock market declined last week, over 10% wiped out in days, some of the strongest moves to the downside ever seen, that had people in a panic.

So let’s have a look at 5 important investment lessons we have learned from past epidemics that are essential to your financial progress when the world seems to be in meltdown.

Lesson 1:  Good investors remain calm

This cannot be said any better than the great man himself Warren Buffet, ‘Be fearful when others are greedy and greedy when others are fearful.’

Good investors remain calm

Wise words from a man with over 60 years investing experience and a net worth of over $80 billion often overlooked in preference of what is shared on social media and news channels.

Again, remaining calm is a trait this stems from good financial literacy and understanding the tools and techniques that are right for private investors and there is no better way than learning how to read charts correctly. This is known as ‘technical analysis’ in the investing world.

Technical analysis and chart reading absorbs all the noise and confusion being pumped out from media channels and gives a very clear picture of what price is ACTUALLY doing.

Lesson 2: Risk Management & Stop-Loss Management Always Pre-Thought Out

How well one performs and lasts in the markets boils down to a number of factors with solid risk-management and stop-loss management principles being near the top.

The sharp declines of last week without a doubt would have caused losses ranging from large unrealised profit being given back to losses on the initial capital.

Giving back unrealised profit after months of holding and patience is always frustrating but protecting your initial capital as best as possible is always the priority. Losses on your initial capital are inevitable and a necessary stage of the growth process when you are first starting out in the market but these should be small and controlled and easily absorbed into large winning investments once the market recovers.

The potential of sharp declines in the market based on news items will already have been factored into the plan BEFORE placing any positions.

Lesson 3: Look for Levels Where the Market Shows Signs of Recovery

While the news may suggest the world is in meltdown, the charts themselves often paint a very different picture. Being able to read charts correctly will help determine ‘support’ levels where price often declines to, bounces off and reverses back to the upside.

It is at these levels where the ‘smart money’ private investors position themselves, wait for the market to show signs of a recovery, a sign that the institutional money is coming back and then jump in and piggyback the ride.

Of course these support levels may not hold and price may decline further, which is where patience comes in and where the smart money waits for signs of recovery first before re-investing their money.

Lesson 4: A Decline is Often Followed by a Strong Bull Market

The coronavirus is not unique, we have dealt with numerous health epidemics in the past causing strong negative declines in the market only for the markets to recover, handsomely rewarding the savvy investor.

These recoveries ranged from 22% growth to 88% growth translating into very healthy profit for those who have learned the relevant techniques, techniques which are simple to learn and execute.

Extracting profit is then down to patience and resilience and where many come unstuck.

The below chart looks at the 3 most recent outbreaks of viruses before the coronavirus:

Lesson 5: Diversify Your Portfolio & Move Through Market Cycles

Ultimately the markets move in cycles and money moves from market to market. The savvy investor recognises the need to have a diverse initial watchlist based on stocks, commodities and currencies and then create a portfolio based on the strongest instruments in whatever market is in trend. This portfolio changes through the cycles of the market.

As an example, since last year, palladium has been one of the best performing assets out there which will have helped to absorb any losses occurred on the decline in stocks.

And if the stock market does continue to decline, then a savvy investor will also know how and when to change their stance from bullish to bearish and be ready to short the market like we would have done in 2008 and 2000 when so many would have lost money holding onto their long positions.

For now, we are a long way off a bear market and early signs suggest that the market has found support and is recovering. If that is the case, then I have one eye on re-entering back into the strongest stocks outperforming the indices.

Remember, only you are responsible for you and your family’s future wealth and so the person that watches the news must be separated from the person that manages the family fund for consistent stress-free long-term gains.