Coronavirus brings an investment opportunity

Many of you are certainly asking what to do with your investment in the current situation. Some have already asked us this question. We consider it our duty to give you our opinion on the market decline and response to the spread of Coronavirus worldwide.

What is happening?

I assume that most readers of this article are aware of the spread of infection of one of the Coronaviruses group in the world, namely COVID-19 (Corona Virus Disease 19). The virus manifests itself as a respiratory disease with symptoms of pneumonia or influenza. Based on the data gathered, it spreads mainly as a droplet infection.

Although the virus has been present in society for several weeks, a lot is still unknown and we do not have an effective vaccine. In the first weeks, the infection spread primarily in the Chinese province of Hubei (Wuhan City).

The response of the governments concerned was timely and appropriate. The primary preconditions for preventing an epidemic, without specific medications, are prevention and quarantine of patients. Two weeks ago, it seemed that the virus had been isolated in China and, in a few cases, outside its borders.

The change in the perception of the virus and the sell-offs in the markets have been caused by the spread of virus in other countries. It turned out, that the virus is likely to have a longer incubation period and that people without symptoms are also carriers.

Apparently, the measures failed to detect infected people who had spread the Coronavirus into other parts of the world. Larger outbreaks have been detected in Korea, Italy and Iran. As a result of these reports, markets have stopped ignoring this disease.

We certainly do not want to play down or even underestimate the situation. We are not virologists or medical experts. We do not want to make forecasts of the future development of the disease or the markets themselves. Indeed, the situation is very dynamic and the number of potential future scenarios is high.

But there is no need to exaggerate it. We use the publicly available information about the virus itself and its spread. Corona is not a cause for panic and, above all, must not be the cause of hasty decisions regarding your financial assets.

So far, there have been more than 111 thousand cases confirmed worldwide. (data as of 9/3/2020 10:30 AM by John Hopkins CSSE). Of which, over 30 thousand cases have appeared outside China.

It should not be considered as a dramatic pandemic yet. There are 12 million people living in the Chinese city of Wuhan, where the disease is spreading and 67 thousand cases have been confirmed there. Mortality rate is around 2% and it mainly affects elderly people or people with poor immunity system or respiratory problems.

The number of deaths approaches nearly 4 thousand and more than half of the known cases have recovered. These are not alarming numbers, but neither negligible. On this scale, Corona is estimated to be 10 to 100 times worse than influenza, but significantly less severe in comparison to SARS or MERS.

What happened to the markets, when do they return and what economic impact can Corona have?

Spread of the virus into other regions of the world has led to sell-offs in financial markets and storing of the capital in safe havens. US stock index S&P 500 dropped 12.8% from its maximum (to the closing level of Friday, February 28, 2020).

The decline was quite steep, but to no surprise, given the unpredictability of the situation. It is also important to realise what the state of markets was before Corona. The stocks have had an extremely strong year 2019 and the decline was preceded by longer-lasting historical highs.

Growing markets have attracted so-called "hot money", that is, speculators. As a result of the expansion, many investments were realised using foreign money, making use of debt (so-called margin). At the same time, several analysts looked for a potential trigger off correction that would lead to profit. It became the COVID-19 virus.

It was the market decline that led to the mandatory liquidation of positions bought with borrowed money (so-called margin call) we witnessed last week and which strengthened the downward trend of markets. They sold so-called “weak hands”, i.e. investors who were forced to get rid of positions for loans, short-term speculators and inexperienced investors.

Corona will undoubtedly have an economic impact on the world today. A potential pandemic creates considerable uncertainty that markets despise, which I attribute as the main cause of the downturn.

Today, we cannot proclaim when will the virus stop spreading, how many people will be infected and how many will be killed. At the same time, we cannot estimate what measures will be taken to tackle Corona, whether states will be forced to quarantine more regions, restrict the free movement of citizens, close offices, public institutions, cancel events and close businesses.

It is the restriction of normal behaviour that affects the economy. As a result of the Corona virus, operations have been shut down, people are travelling less, they delay consumption and world trade is being restricted. Several companies outside the affected regions are suffering from lack of supply and stagnating sales.

With regard to the above-mentioned circumstances, the market decline is to be expected. It is certainly justified. On the other hand, as is customary in such unexpected situations (e.g. Brexit vote or Fukushima accident), the market reaction tends to be exaggerated, its consequences are short-lived and return quick.

This scenario is currently also the case for Coronavirus. All of its economic downside mentioned above, will become strong incentives for the world economy when the situation gets under control. Companies will have to replenish their stocks, meet the demand and people will have to make postponed expenditures.

Large and long-term volumes of money are waiting outside the market waiting for better entry. Many investors missed the last year's rally and banging their heads against the wall, they look for every decline suitable for a potential purchase.

In addition, we can count on the support of governments and central banks, as we have witnessed even today (2.3.2020). Several central banks have committed themselves to act and provide support to the economy and thus to the markets, which has currently led to market stabilization.

However, markets will remain volatile for some time. Corona will not disappear from the world map in a few days, and I tend to believe that the situation may even worsen before it starts to improve. Today, we cannot expect that the spread of the disease will stop from one day to the next.

From a market perspective, current developments can also be seen as beneficial. Markets will become refreshed, speculators and hot money will be pushed out, the valuation will decline and it will reflect reality more closely. At the same time, it is possible to assume a partial refreshment of the real economy, i.e. the disappearance of bad and inefficient business projects. The current developments will literally simplify investment decisions. 

The return of the stock markets can be just as swift, as its development showed us on Monday, March 2nd, 2020. The only thing needed is for positive news to appear, e.g. in the form of a vaccine or slowing down the spread of the disease. In those case, we will witness mass purchases and the closing of short positions betting on market downturns (so-called short squeeze).

How to react in case of regular investments?

The overwhelming majority of investment account in Finax has set up a regular monthly investment. Finax is in operation for two years, so our clients have just started investing effectively and are in the initial phase of building assets. 

They save for big goals like retirement, paying off a mortgage, securing children or passive income. All of these objectives have a long investment horizon.

The initial deposits of long-term savings are being invested for the longest time. Thus, they give the compound interest the most time, i.e. the biggest space to express itself. Therefore, the more advantageous they are, the better will the end result of the investment be.

For the regular investors at the beginning of their investment savings, the market decline is their best opportunity, because they will be able to make the first purchases advantageously.

Therefore, if you send funds to Finax regularly, you do not have to deal with the Coronavirus at all and the market decline is a welcome sign, helping you with your long-term investment. Expecting, that the value of the account will only increase from the first investment onwards is in case of investing and especially passive investing unrealistic.

The following chart shows the development of a regular 100 € monthly investment in a modelled 100% Finax equity portfolio, started at the worst possible time over the past 15 years - at the top of the markets before the major financial crisis in October 2007 until the end of the year 2019. The orange curve represents the accumulated deposits and the blue curve represents development of the value of account.

Note: All data related to the historical development of the Finax portfolios are modelled and were created based on the data re-modelling. We described the methodology of modelling historical performance in How do we model the historical development of portfolios. Past results are not a guarantee of future returns and your investment may result in a loss. Find out more about the risks you are taking when investing.

Regular investing averages the purchase prices of stocks, during market declines it decreases them. Subsequent price increase has a greater effect on your investment. As the chart depicts, the regular investment did not experience such fall in value in comparison to deposits. The account development curve is smoothened.

If you are a regular investor, the best thing to do is to do nothing and let the standing order continue to send funds to your Finax investment account. This will help achieve higher returns.

If the decline persists, consider extraordinary investments, as long as you have sufficient reserves and funds available, as described below.

How to approach lump sum investment?

The basic recommendation is to avoid emotions. I am fully aware that looking at the decline in the value of the investment and the loss of money is not pleasant. I have experienced it many times in my life and will experience it many more.

However, all emotional decisions are flawed and lead to worse investment results. Believe me, do not try to convince yourself and unnecessarily experience the result of emotions.

Every one of you has set up an account in Finax for long-term wealth building. Most of your goals have an investment horizon of over 10 years.

You cannot change your investment strategy, with which you fully agreed with two weeks ago, after a week of unfavourable development. You invest for several decades, we have set up your portfolio that way, so you cannot be disrupted by short-term development or even several days of development, even if it hurts. Otherwise, you will never be able to reach your goal.

Although I am not saying that the worst behind us (but it cannot be excluded either), I do not recommend jumping out of positions today. Such action does not make any sense. Stocks have lost more than 12% and the only think you would achieve is validating this loss and accepting it. 

Trying to sell investments today with the vision of buying at lower prices in the future is an illusion. You will never be able to predict the bottom and the vast majority of such minded investors will return to the higher market than when they have sold.

Even if you manage to make a better purchase in the future, it will not be the result of your skill, but the result of your luck and most importantly coincidence. And these are not considered as a very successful investment strategy.

Is it time for extraordinary investments??

Think the other way around. Be grateful that you are already an investor. Otherwise, you wouldn't even know about the decline, most likely, it would have come to your attention, but you would ignore it afterwards and you would have definitely not considered it as the right time to start investing. Think of the current situation as an opportunity you've been waiting for.

The discount is already quite attractive. Take advantage of someone selling under the influence of emotions and only afterwards asking whether they did the right thing. Emotional sales tend to go deeper, and that is happening now.

But it is not necessary to hurry with investing now and go all in immediately. As I mentioned, the end of Corona may not be in sight yet. But also take into account the fact that the situation can turn very quickly at any time and then, you will not be able to catch the turn. Invest before, not after.

Therefore, I recommend you to distribute funds, that you can commit in the long term and that are currently sitting on your bank accounts or conservative investment solutions, over 3 to 4 investments. You will make them gradually over the next few months in addition to your regular monthly deposits.

This way, you will take advantage of the current opportunity and, at the same time, you will not be surprised, if the markets decline further. Manage your money soberly and don't let emotions control them.

Everyone wants to buy at the bottom after a decline. When that situation occurs with existing investments, all of a sudden everyone wants to do the exact opposite. They would rather leave their positions and stop investing.

No, markets will always return. Corona may be a test of human society, but we will overcome it as well. It has always been this way and always will be. Anyone who realises this will be satisfied at the end of the day. I will add to this a great quote from my favourite financier and author Larry McDonald:

"Buying right is never nice."

With good purchases on the market, you always have a bit of discomfort and a lot of questions. Is this the right time? Isn't the market going even lower?

Profit is mostly made when you buy, not when you sell, so if you think of such ideas today, it is your time to increase your investment.

It is the rational, emotionless act and the perception of opportunities that distinguish successful investors from unsuccessful ones. They buy when it's not easy, when there's panic.

The most important asset you have when investing is time. Only its sufficiency can effectively eliminate the market risk of your investments. The biggest mistake is to interrupt the investment after half a year if you have planned with a 20-year investment horizon. This is a violation of the basic investment rule - failure to meet the horizon.

What to do when the market drops?

If you are really able to provide your investment with enough time, do not speculate and ignore the current downturn, try not to think about the investment and do not to check its development so often. The investment will earn you as long as you keep the originally planned horizon.

The following chart shows the development of a lump sum investment, started at the worst possible time over the past 15 years, as shown in the previous example of a regular investment. The chart shows that time is the most important variable - the return of a lump sum investment is greater than the return of regular investment.

Change in investment strategy

Today, I do not recommend changing the investment strategy in your investment account to a more conservative strategy (increase the share of bonds at the expense of equities). The effect and essence of this procedure is exactly the same as stopping an investment with the vision of better purchase in the future. The chances of you succeeding are poor.

In the event of even a larger decline, our unique automated rebalancing will take care of buying of the sold-out equities for the benefit of the investor.

We would like to make our clients aware of the fact that we make purchases and sales to / from portfolios once every two weeks. List of buying days can be found here. Therefore, it is possible that markets will be in a different situation, when we purchase for your money. Also, with this measure, Finax wants to reduce the volume of speculative capital in long-term investments.

We are experiencing a relatively unprecedented situation. Personally, I do not remember a similar problem occurring during my financial career, which would spread in this way, thus threatening the economy and markets. Yet, there is no reason to panic, and none at all to liquidate investment positions.

First of all, I think of Corona as an interesting opportunity. This is a situation that occurs once or twice in a person's life and will be written about in history books.

In these moments, the most important thing is to keep your head cool, stay rational in your personal life and in the field of finance. This is the only way to prevent major damage.

We are closely monitoring the situation and will bring you regular updates on its and financial markets development. Follow our podcasts and blogs. In particular, do not rush your decisions and do not cave in to emotions.

I firmly believe that the spread of the disease will soon stop and I hope that it will not require any major measures limiting our daily lives. I also hope that the number of virus casulties and cases will stay as low as possible.

Thank you for your confidence in Intelligent Investing, I wish you strong nerves and stay healthy.