Financial Lessons from the Coronavirus!

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Over the past few weeks, the global impact of the coronavirus on health and economics has taken center stage.  Investors all over the world are concerned about the unusual downside market volatility as uncertainty surrounding the virus continues.  When it comes to financial markets, many investors focus only on the upside potential of markets and disregard how quickly things can change and turn negative.  As investors and money managers, we must always be thinking of downside risk and allocate capital accordingly.  Whether it’s a global health crisis, financial crisis, technology bubble, etc., complacency is a killer!  Below are some ways you can avoid this complacency and design a portfolio built to withstand whatever markets throw at you!

Understand What You Own

How many investors truly understand how their capital is allocated?  I would argue very few!  Not to pick on owners of mutual funds, but they are the best example that drives my point home.  Most investors allocate money towards these investment products with little understanding of what they own.  As a result, when markets are in an upward trajectory, everything seems fine, but when markets get rough, panic sets in.  Panic leads to irrationality, irrationality leads to poor decisions, and poor decisions lead to poor investment outcomes.  Recommendation:  Take the time to understand what you own!  Whether it’s mutual funds or individual companies, understand how the companies you are investing in make money and how they are likely to perform in both positive and negative economic environments.

Design a Humble Portfolio

My partner Stewart Welch likes to say, “the market will make you feel great 1/3 of the time, miserable 1/3 of the time, and indifferent 1/3 of the time.”  While a well-designed portfolio will not entirely eliminate the feeling accompanied with negative markets, it will allow you to navigate those moments confidently.  So how do you design such a portfolio?  Recommendation:  Be proactive, not reactive, by setting clear goals and ensuring a proper mix of risk and conservative assets to meet those goals.  The key here is not to get greedy!  Take just enough risk to achieve your goals – no more, no less!  While your portfolio may slightly underperform more aggressive portfolios in good years, you will limit capital destruction during the negative years, which in my opinion, is more important.

Reduce Risk/ Seek Alternatives

Warren Buffet has a saying, “Be fearful when others are greedy and greedy when others are fearful.”  The last ten years were amazing times for investors. Although the economy seems to be on a sound footing, there is no law against reducing risk in your portfolio by seeking more conservative investments, or alternatives to investments altogether.  Recommendation:

1) Rebalancing and taking profits in good market environments is key for long term investment success.  Establish your own discipline, but make sure this gets done at least annually.  2) Don’t neglect to pay down debt!  I often recommend clients take profits to pay down various forms of debt, whether it be home, credit card debt, etc. in good times.  By paying down this debt, you are guaranteeing yourself a rate of return that is currently unmatched in today’s fixed income markets.

Remember, hope is not a method!  Do the work to avoid the panic!  If you feel the above recommendations are unachievable due to your own personal time constraints, knowledgebase, etc. seek a Certified Financial Planner® Professional to help.

Follow The Welch Group every Tuesday morning on WBRC Fox 6 for the Money Tuesday segment.

Fox 6 Talking Points:

  • Understand What You Own
  • Design a Humble Portfolio
  • Reduce Risk/Seek Alternatives 

Marshall Clay CFP, JD, is a Partner and Senior Advisor at The Welch Group, LLC, which specializes in providing Fee-Only investment management and financial advice to families throughout the United States. Marshall is a graduate of the United States Military Academy in West Point, New York, the Cumberland School of Law in Birmingham, Alabama, and is a CERTIFIED FINANCIAL PLANNER™.  In addition, Marshall is a frequent guest on local television stations as an expert on various financial planning matters.  Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by The Welch Group, LLC (“Welch”), or any non-investment related content, made reference to directly or indirectly in this article will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  More information about The Welch Group and important Disclosures can be found on our website. Consult your financial advisor before acting on comments in this article.