Articles on investing and capital management, with a quantitative focus.

#bigpicture - Big picture thoughts

COVID-19 and Stocks


Disclaimer: These are my own personal opinions, and I'm writing about what I am doing. I don't have the credentials to tell anyone else what to do with their investments.

Posting an article like this one is risky, because at some point in the future, the outcome of the COVID-19 virus will be known. With the benefit of hindsight, it will be "obvious" what an investor in February 2020 should have done.

However, I am writing this at a point in time when we don't know what the outcome could be. I think it's important for an investor to remember that there are many possible outcomes from this, and we can't predict the future.

Should an investor position themselves more defensively in anticipation of catastrophe? Or do nothing, assuming the outbreak will subside?

The market is always a risky place

The stock market is always a risky place, and prices are always vulnerable to public sentiment, emotions, and catastrophe. COVID-19 is just one instance, but there are countless things which could knock stock prices down. In other words, if it isn't this virus, then it's something else.

So let's remember that stocks are always risky, period. They can fall significantly for many reasons, and the reason is always a surprise!

COVID-19 is not a unique threat; it's a very standard threat to stocks.

Will this cause stocks to fall?

There seems to be a widespread belief that COVID-19 will inevitably reduce stock prices. I am not so sure.

Instead, stocks could go either way from here. Imagine that the virus turns out to be relatively mild. Once more statistics are available, we might find that it only causes serious illness in a small percent of infected people.

The market could decide it has overreacted, and return to previous levels. Fear could be replaced with euphoria, and new all time highs.

It's impossible to know which way stocks will go. Stocks could go up or down from this point. They can always go up or down.

How I am reacting

Instead of viewing COVID-19 as a unique threat to the stock market, I view it as a reminder that the stock market is generally risky.

I would go back to the core ideas of risk and asset allocation, and decide on some asset allocation which is appropriate for me. I am sticking with the PRP allocation which is only 30% stocks.

I also recently learned of AOK: iShares Conservative Allocation ETF, a low fee fund containing 30% stocks and 70% bonds. I can't tell anyone whether it's right for them, but AOK is similar to my own investments, with the same stock risk.

Other people are comfortable with far more stock risk, and that's fine too! My point is that everyone has to decide what risk level they want. If I went through the exercise and decided that I'm not comfortable with how much I have in stocks, then I would reduce my allocation to stocks.

Once I've made that decision, I don't see any reason to change my strategy or take any defensive action for any specific event, COVID-19 or otherwise.

Since I already made my stock allocation decision some time ago, I'm just continuing with the same investment plan. No change.

Jem Berkes