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What to Do (With Your Portfolio) about a Likely Pandemic

As of the end of Friday the stock market was down about 13% from its peak earlier this month.

The World Health Organization has declared has declared COVID-19 a “Public Health Emergency of International Concern.” The CDC says that “current global circumstances suggest it is likely that this virus will cause a pandemic.”

These are scary times.

Because some people have asked: no, we have not made any changes to our asset allocation. It’s still 100% Vanguard LifeStrategy Growth (which is 80% stock, 20% bond).

That’s the point of strategic asset allocation, after all: to find an allocation that you’re comfortable with, even in scary times.

And this, right now, is why we spend so much time talking about risk tolerance. It’s important to know how well you tolerate risk. So take a moment to ask yourself: how well are you tolerating this risk? Right now, when you’re actually seeing and feeling some risk, is precisely the time to make that assessment.

Assessing your risk tolerance at a time when the markets are shooting upward is a recipe for disaster. When markets are shooting upward it’s easy to look at data about historical market declines and say, “yeah, I’d be OK with that.” It’s another thing entirely to actually see that your portfolio has declined by more in the last week than you’ve earned at your job in the last year — and to know that the upcoming week could be just as bad.

Another thing to take note of here is that almost nobody was talking about coronavirus even just a few months ago. Whatever the big scary thing is that sends the markets tumbling, almost nobody sees it coming. It’s always new. It’s always a surprise to most of us. It’s always scary. That’s the point.

Pick a portfolio with which you are comfortable even now.

To be clear, I don’t know if or how far the market will continue to drop. I have no idea what the next week, month, or year have in store for us.

And frankly, nobody does.

The guesses are all over the map as far as how bad the outbreak will be. And even if we knew how bad it would be in terms of human suffering, it would still be a major challenge to get a ballpark figure for what the cost would be in terms of “how much less profitable will companies be going forward, relative to how profitable they would have been if not for the virus?” Because that’s ultimately what the change in valuation comes down to.

On the whole though, businesses will keep earning money. Stocks will be profitable, eventually.

So to summarize:

  1. Market declines are scary, and a significant part of that scariness is due to the fact that they’re usually linked to some largely-unforeseen, scary real-world event.
  2. A market decline is the only time to assess your risk tolerance. Now that you are actually seeing and feeling some risk, how well are you tolerating it?
  3. You want to pick an allocation with which you are comfortable, even during the bad times. And then stick with that allocation! Don’t adjust to a higher stock allocation later, or you’ll again be caught with “too much” risk during the next downturn.
  4. Nobody ever knows what’s coming next for financial markets.
  5. Stocks will be profitable, eventually.

We didn’t make any portfolio changes. What we have done in our household is what the experts are recommending: stock up on nonperishable food, toiletries, and our over-the-counter medications. (It’s an easy action to take because there’s no downside — it’s all stuff we’ll use eventually anyway.)

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