This guest article is by friend of Monevator and former hedge fund manager Lars Kroijer, who is also the author of Investing Demystified.

The emergence of the coronavirus over the past two months has dominated the news and preoccupied the markets.

The virus is already having a real impact all over the world, as millions curtail travel and social interactions, and suffer financial or – worst of all – great personal loss.

At the time of writing, more than 4,000 people have died globally. The great worry is this number could increase dramatically as the virus continues to spread.

Stock markets plummeted again on Monday before rebounding on Tuesday – and of course nobody can know where they will go next. The expected future risk of the markets have spiked recently, too.

For as long as there continues to be huge unknowns about the path and severity of the virus and its economic consequences, uncertainty will continue to reign.

What – if anything – should we do about all this from an investing perspective?

Getting a VIX on things

In previous posts on Monevator I’ve argued it’s highly unlikely you’re able to outperform the markets, or to find someone who can consistently do so for you.

The world may be in a panic state and markets have declined, but this is still overwhelmingly likely to be true.

Also, markets might be down and you may have lost money, but that doesn’t necessarily mean they will recover – no, markets don’t always bounce back.

The fact is that unless we have genius insights or a crystal ball, we almost certainly don’t know the future direction of the markets or even individual securities.

So what do we know?

We know that the world is now deemed to be a far riskier place for equity investors.

While not a perfect or long-term index, the VIX (a measure of predicted future risk of the equity markets) has increased from an expected standard deviation of under 15% to around 50% at the time of writing1.

This is important because it is the world telling you that your equity holdings are a lot riskier going forward than they were a month ago – though that’s perhaps an obvious point!

With this higher risk, it is not unreasonable to have a higher future expected return from shares from here, but then again the market is also telling you that very bad outcomes have become far more likely, too. Whether that impacts how you should adjust your portfolio really depends on your risk preferences and personal circumstances.

There is also every chance that your other assets – house, job, career prospects, and so on – have been impacted by the virus, perhaps indirectly, though you may not know it yet. This hit to your wider economic life will likely be far more muddled than simply saying you lost 20% in your equity holdings but your government bond holdings did quite well.

If you’re unclear about the potential impact and you have an advisor with insight into your overall financial situation, I would recommend a conversation. Focus especially on the liquidity of your assets and liabilities, and the likely increase in the correlation of the value of your various assets.

Prep school

I don’t have any kind of unique perspective into what will happen with the virus or its impact on the global economy.

But as the volatility index is suggesting, it does seem obvious that the risk of a very bad state of the world has increased dramatically as the virus has spread across the globe.

So I think it makes sense plan accordingly.

In my book Investing Demystified I wrote a chapter called ‘Apocalypse Finance’ about what we should do at such times from an investing perspective, depending on the severity of the financial collapse. We’ve tweaked and republished this chapter below.

While things have obviously changed since it was written four years ago – and it doesn’t discuss any specific kind of disaster, let alone a pandemic – I hope you’ll find some useful insights.

Apocalypse investing

Let’s consider the highly unlikely. Some would say paranoid. How bad can things really get and what might happen to our investments in a worst case scenario?

We obviously don’t know, but I think it is important to discuss how our investments would fare when all our plans are out the window and the world has gone haywire.

Not long before the financial crash of 2008, a book called The Black Swan2 by Nassim Nicholas Taleb was published. It caused quite a stir in the financial community.

The title of the book refers to an age-old assumption that all swans were white. Swans had always been white and it had almost become part of the definition of being a swan – that it is a beautiful, graceful, white bird. The swan-watching community (if there is such a thing) was therefore aghast and confused when a black swan appeared out of nowhere. Everything the community knew and had taken for granted was suddenly in doubt when such a fundamental assumption as the colour of a swan could be shattered in an instant.

Taleb uses this parable to make a mockery of common parameters of risk used in finance. He describes how if you assume the annual standard deviation of the S&P 500 is 15%, then a drop of 45% would represent a three standard deviation move. Without skew or fat tails3 this should happen approximately 0.14% of the time, or about every 700 years. In reality it seems to happen every couple of decades! I’m grossly simplifying, but I think Taleb would forgive me in the interests of getting a complex point across in a paragraph.

Where am I going with this? I think we need to occasionally think about what most of us consider highly unlikely and undesirable scenarios.

Previously I’ve written about the short-term government bonds of the most creditworthy governments in the world, and how there are probably no securities that are lower risk than those.

But what if we, for a moment, allowed for the possibility of a complete collapse of society, with governments going bust and law, order, and property rights all negated?

The unthinkable is unthinkable

It’s hard for most of us to imagine what this kind of complete breakdown looks like without knowing much more about the reasons why it happened.

For instance it struck me as odd when watching the movie Contagion (about a lethal virus) that even with 40 million people dead in the US and in a state of complete panic, the main characters still walked around in clean clothes and drove their cars.

Would there really be functioning general stores and petrol stations with the world in such a state? Would your credit card be working? Electricity and water? Could you get your money from the bank – and if you could would that money be worth anything?

I am going against the logic of Taleb’s book in even discussing how society’s breakdown could happen or its consequences. Taleb discusses the ‘known’ unknowns and the ‘unknown’ unknowns, and to my mind basically concludes that we don’t know squat, other than the fact that unlikely events are more likely to happen than we think.

By even discussing ways in which the highly unlikely may happen and its consequences, in Taleb’s mind I may be missing the whole point that the unknown is exactly that, and trying to forecast it is a doomed undertaking.4

Still, how we protect ourselves and our loved ones from an investing perspective if society breaks would depend slightly on how it happened.

Was the disaster due to a massive natural shock that we survived? Was it war? Was it an epidemic that wiped out half the world’s population over a couple of months of sci-fi style mayhem?

Gold as security

The ownership of gold in such a meltdown may make a lot of sense. Over the past centuries gold has served as a great bartering tool, whether held as gold bars or in the form of jewellery.

Thinking of gold as a good hedge for markets that are so desperate that your investment in assets such as AAA-government bonds is worthless suggests a state of almost complete collapse.

We all remember the horrible stories from World War II when people bartered gold or jewellery for things like food or shelter or the possibility of escape. People who have studied history and worry that it may indeed repeat itself may find that owning gold has some insurance value to them.

One point of caution on owning gold: suppose you get exposure to it by owning a gold-mining company or an exchange-traded fund (ETF) that tracks gold. The value of those assets would track the value of gold closely as the world heads towards turmoil. But would they actually be of value to you in the case of complete breakdown?

Maybe not. Depending on the exact disaster there may not even be a functioning stock exchange where you can sell your gold correlated securities. And the bank where you held the securities in custody might be a ruin.

Perhaps as a cautious investor you have some gold bars at a very conservative bank in a vault that could withstand ten atomic bombs or whatever disease the evil spirits have thrown our way. But again, the gold here may not be of use to us when we need it.

Would the bank actually be open for us to go and collect the gold? In such a desperate state of the world would we trust that the employees of that bank had not broken into the vaults and stolen the valuables if that meant feeding their children?

Even in the case where you were able to go to the bank and pick up your valuables, you may not want to. In a completely broken-down society, imagine what it would be like to walk out of a bank with a bunch of gold?

You’d undoubtedly glance nervously over your shoulder as you exited the bank and police protection may be non-existent.

If not gold, then what?

Obviously the scenarios I describe above are extremely unlikely. Major disasters of such magnitude have only happened a couple of times over the past century. Even in those cases it was not disaster everywhere in the world, simultaneously. Of course those caught up in the horrors of war or mayhem will find it scant comfort that things are better elsewhere; they are forced to deal with what is in front of them.

If you can’t realise the value of securities or even pick up valuables in a safety box at a bank then the breakdown of society as we know it today would be so complete that we individually would probably be worried about other things, such as shelter, security, food, and water. Probably the last thing on our minds would be how to best invest our assets. Indeed people with the paper version of this chapter would probably burn it for warmth, while mocking the memory of the orderly and stable society most investment books take for granted.

In certain circumstances, ancient jewellery has historically been a preserver of wealth in times of great distress. It is easy to store, hide, and transport. That said, as with gold I would caution you against storing lots of expensive jewellery at home: the risk of theft could quickly eliminate any benefit from holding it.

In certain cases property may be a good asset in times of extreme distress – even if it is illiquid for immediate use. Besides the possible benefit of it as arable land, if the crisis passes there may well come the day where the rule of law prevails and you can reclaim your assets. While shares in companies may be worthless with the companies long gone, property may maintain some value.

Finally, there is some protection through the holding of the broadly diversified portfolio. Although the scenarios discussed above are clear calamity scenarios, there is some chance that part of the portfolio will survive and maintain some value as a result.

Even in our highly interconnected world, a global tracker is geographically diversified. Holding securities in companies in diverse locations such as Australia, Brazil, Canada, Europe, the US, China, and Japan may be of some value if calamity strikes your London home base. For all the securities in such a portfolio to be rendered worthless a calamity would have to strike simultaneously all over the world.5

How could 2008 and 2009 have happened?

My point with the crazy stories above is that your best investments in times of great distress depend on how you define ‘great distress’.

If you define great distress as what happened in 2008, then a AAA-rated government bond is indeed a great preserver of value. In fact things could have gone a whole lot worse than what happened in 2008 and that would still be the case.

But although my suggestions of societal breakdown may seem alarmist or like scenes from a bad science fiction novel, if we’re talking about extreme ‘black swan’ events then conventional thinking is redundant.

I remember talking to a few friends at collapsing financial firms during October 2008 and again in March 2009 as they were navigating their way through the mayhem. One phrase I remember hearing a couple of times, mainly as a joke, was: “If this gets any worse, it’s guns and ammo time.”

While I chuckled back then, it was interesting and scary to see how fast the world could go into panic mode, even without a trigger like war, epidemics, or natural disasters. This was a panic caused by the falling house of cards that most of us had helped build through the creation, purchase, regulation, complicity, or ignorance of a crazy, headless, expansion of credit.6

As bad as things were at the worst point of the 2008–09 crisis, they could clearly have been much worse. There were still functioning financial markets, no governments had defaulted (they had in fact been able to oversee large and necessary bailouts), there was no hyperinflation or threats of war, and there was no widespread civil unrest.

Suppose that instead of the world recovering from the darkest days of the 2008–09 crisis, things had taken a turn for the worse.

We would probably have had a complete collapse of the financial system. Virtually no banks would be in business, or at least not be operating like we take for granted they do today. Your insurance policy would probably be worthless, with the underwriter bust. Many governments around the world would be unable to meet their short-term debt maturities and be in default. There would be nobody with liquidity to buy their debt.

With no functioning financial institutions, trade and commerce would completely dry up. Why would you deliver goods to store when there was no real way you could get paid? Similarly, petrol stations might not be working and public transport would be a mess. (An informed friend told me that the UK has about three months of food reserves and six weeks of fuel, assuming normal consumption patterns.)

Tax revenues would plummet further, as there would be far lower incomes to pay tax on and commerce would have come to a halt (so no sales tax or VAT). The absence of tax income and the inability to refinance short-term bonds would cause the government to cut back severely on spending, including benefits, pensions, education and medical care. Sensing what was in store though, the government might increase spending on police and the military. With the inability to fund itself the government might start issuing IOUs (promissory notes), but these could lose credibility quickly as it became apparent that the prospect of repayment was poor.

People who lost out to these major government cutbacks would probably be extremely agitated. Civil unrest might break out. We have seen cases of civil unrest (like the London riots) or larger protests at government spending cuts in relatively normal states of the world. But since the picture I’m painting is much worse, we can assume that even more widespread unrest could dominate. Where all this could lead is anyone’s guess, but probably nowhere good. The whole infrastructure of society would come under great stress.

The scenario I describe above probably won’t happen in my lifetime, the lifetime of my children, or even the grandchildren I hope to have one day. Or at least I hope it won’t! My point is to demonstrate that we must have a flexible mind when we consider all the possible outcomes in our investing lives.

The question is: how should we think about investments in a state of complete societal breakdown, not seen in my lifetime, at least in the Western world? These could include potential scenarios where property rights have broken down, there is no police or food on the shelves of the stores, and your money is worthless anyhow.

As I see it, a simple passive portfolio mixing a global tracker with your minimal risk asset – what I call a ‘rational portfolio’ – remains superior in virtually all states of the world, except in the scenario where the world is left without property rights and all investment assets across the world are worthless.

In a highly unscientific ranking of different levels of societal breakdown here are some thoughts on what you might want to own:

• Depending on the level of breakdown, we could still be safe with AAA-government bonds (though they would probably not still be AAA anymore) – potentially from countries other than our own.
• In slightly worse scenarios we would probably want to own fixed assets such as a house or property. There would still be value somewhere in the broadly diversified rational portfolio, as the whole world probably would not go bust all at once.
• In an even worse scenario than this where property rights are out the window, we would probably want to own high-value yet easy to hide and transfer goods like gold or jewelry.
• In complete mayhem we’d want shelter, security, food, and water. And indeed guns and ammo.

If you are inclined to think the worst is remotely possible then perhaps Google ‘preppers’ and explore the world of people who are actively preparing for the collapse of the world order as we know it. Personally I think they are paranoid and a bit crazy, but they would equally consider me naïve.

Finally, the emergence of virtual currencies/commodities like Bitcoin may someday provide additional financial shelter and be a potential alternative to gold. These cryptocurrencies are still in the nascent stages, but if they end up as a recognised asset that can be stored securely I wouldn’t be surprised to see their value go up at times of turmoil and stress in the financial markets. I would caution you to consider risk of being hacked though – particularly at times of lawlessness – and also to think about whether there would be enough ways for you to practically utilize your Bitcoins, either via payments for goods, or else to translate them into the fiat currency you’d need to spend.

Oh, and if you’re going to fill your cellar with tins of baked beans then don’t forget to also pack a tin opener!

1. 10 March 2020 [↩]
2. The Black Swan: The Impact of the Highly Improbable (Penguin, 2008) [↩]
3. i.e. Big moves that are more likely than suggested by a normal distribution. [↩]
4. Though paradoxically he also discusses buying government bonds and put options to protect against calamity, which both assume somewhat functioning financial markets to profit from the disasters. [↩]
5. Many companies in the world equity portfolio have large net cash holdings (Apple has over $200 billion in cash at the time of writing) unlike governments, which are typically large net debtors. In a really nasty world scenario those cash holdings might prove invaluable and ensure they survival longer than many governments! To ensure you actually own those underlying stocks you would want your ETF to be physical, as opposed to synthetic, where you take credit risk with the issuer. [↩]
6. I recommend reading How I Caused the Credit Crunch by Tetsuya Ishikawa (2009, Icon Books). Tets, who was very involved with crisis events while at Goldman and Morgan, wrote a funny book about the financial crisis. [↩]

What caught my eye this week.

You know you have a decent market sell-off on your hands when brokers start to experience outages due to trading volumes.

So it proved in the US this week, when the multi-billion dollar startup Robinhood periodically prevented its users from accessing the market after its systems froze in the face of coronavirus panic trading.

James Koncar, a Robinhood user from Tampa, told Business Insider that he’s upset at missing out on the action:

Koncar said he reported Robinhood to the Securities and Exchange Commission and is considering filing a complaint with FINRA1 — and added that he won’t be using Robinhood in the future.

“Sure, I lost money, but there’s no guarantee that I would’ve sold at open Monday. The point was I was completely unable to until it was too late,” he said. “They opened the door for other brokers to offer commission free trading and I will be taking advantage of that with another broker.”

Perhaps in the post-correction future, Robinhood customers will sue the firm for actually being open for business later on in the week and therefore enabling them to panic-dump their shares?

My cynicism aside, as far as I know all the major retail brokers in the US now offer commission-free trading, after Robinhood kicked down that particular door.

With its USP gone, I wonder if Robinhood will become one of the first major market victims of the coronavirus – or at least a takeover target?

Trade-offs

In the UK most non-fund investors are still paying to trade – though Freetrade has begun to challenge that after it scrapped even its modest £1 fee for instant orders. (Sign up via my link and we both get a free share).

And in the absence of (tax) free trading, churning our portfolios – rarely a great idea, anyway – can be a definite drag on returns.

It’s also probably pointless, as adviser Blair duQuesnay writes:

When we get scared, our brains produce the hormone cortisol, fueling our fight-or-flight instinct. This served us well for thousands of years when we were running from predators on the savannah.

The prevalence of news and information (and misinformation) is fueling those fears at an instantaneous reaction speed.

What is an investor to do?

‘Nothing much’, is her sensible conclusion.

Spock-onomics

The latest estimate from scientists at Imperial College is the virus has a death rate of around 1%. While lower than early estimates, it’s still much worse than normal flu. However it’s far far less deadly than SARS and the other exotic killers.

And as I stated last week, from the perspective of assessing Covid-19’s long-term hit on the economy, it’s not heartless to note that the vast majority of those who die will be elderly or infirm, and that quite a few would have died fairly soon anyway. Rather, it’s essential.

This doesn’t mean their deaths matter less in human terms. Every death is a tragedy for someone. But it’s a far lighter economic blow than if the virus was stalking 30-somethings.

As Jeremy Faust writes in Slate:

Yes, this disease is real. And, yes, there truly do appear to be vulnerable patients among us, those far more likely to develop critical illness from it. And that relatively small subset, if infected in high numbers, could add up to a tragically high number of fatalities if we fail to adequately protect them.

The good news is that we have huge advantages to leverage: We already know all of this and have learned it remarkably quickly. We know how this virus spreads. We know how long people are contagious. We know who the most vulnerable patients are likely to be, and where they are.

Healthy people who are hoarding food, masks, and hand sanitizer may feel like they are doing the right thing. But, all good intentions aside, these actions probably represent misdirected anxieties.

When such efforts are not directly in service of protecting the right people, not only do they miss the point of everything we have learned so far, they may actually unwittingly be squandering what have suddenly become precious and limited resources.

The stock market doesn’t care about the miserable sight of bodies piling up in the morgue. It isn’t irrational. The crash that is going on right now represents humanity’s greatest prediction machine trying to figure out the scale of the hit to corporate earnings. That’s its job.

Our goal as investors is typically to try to be richer in the future than we are today. We make our decisions accordingly.

The only way to ensure you’re not poorer tomorrow – literally – is to sell everything right now. But most people who do that will struggle to get back into the market at a better time. They will likely end up poorer for their actions in the long run.

So we raise our eyes to a further horizon. If you’re retiring in ten years and you have a plan based around a sensible asset allocation and realistic return expectations, what’s changed?

Absolutely nothing. Diddly-squat. Nada. Zilch.

Keep on keeping on.

This is true even if we do see long-term societal changes in the aftermath of the virus. Some are predicting a change in working patterns, for example, or a mass re-shoring of manufacturing previously sent to China.

I wouldn’t ask a man running about in a house on fire where he see his career being in five years. But I suppose there could be consequences.

Never mind, assuming you’re a passive investor. Some companies may profit if more of us work from home in the future , as the blogger Indeedably predicts. Others will suffer if this scare teaches people they don’t need to fly so much or have so many face-to-face meetings.

But companies are always rising and falling, just like the overall market. You own them all in your index funds. Fluctuations were baked into your return expectations.

This too shall pass.

Viral marketing

Mr Money Mustache notes:

In my lifetime alone, we have seen the rise and decline of quite a list of worldwide health scares, each of which was covered in the news with similar intensity to what we see today. AIDS, Ebola, SARS, Bird Flu, and the 2009 Swine Flu pandemic, also known as H1N1. That one was particularly serious in retrospect, having infected between 11-21% of the world’s population and taking the lives of about 500,000.

Yet here we are, with that fearful event gone from the rearview mirror and a global economy that is far richer than it has ever been.

Which is exactly what we will eventually be saying about the present moment in time, from our vantage point in the even more prosperous future.

I suggested last week that most of us could get Covid-19 over the next few months. The official UK thinking seems to be moving in that direction.

Meanwhile the chief medical officer now reckons that 50% of cases will probably happen within a three-week period and 95% within a nine-week period. The capacity for strain is clear

Still, do you think this virus will seem quite so scary, when we all know people who’ve had it and we’ve possibly had it ourselves?

Unlikely.

Unless you plan to dedicate yourself to this crisis full-time, I’d suggest you’re best off ignoring it from an investing point of view. The media is certainly full of nonsense. To give just one example, I heard apparently sensible people on the financial television today saying it was time to buy China because “the rest of the world had to deal with the virus” whereas China is “moving on and returning to normal.”

Is it credible that the world will suffer a coronavirus pandemic while its most populous country is granted some sort of nationwide immunity, due to one city getting there first? I’d suggest not. Yet that was presented as a sensible scenario by someone with billions of assets under management. These people are out of their depth.

The science is fascinating, and I’ll continue to track it. By all means try not to catch the virus. Definitely look out for those most vulnerable in your life – and perhaps help them part-isolate before they get the virus, rather than afterwards. Follow the story for intellectual reasons, and wonder if Google’s AI has already guessed at its underlying structure.

Be prepared to mourn someone.

Know that your portfolio could potentially go down another 10-30% or more. I don’t expect the worst, but it happens often enough and it’s clearly possible given that we’re probably headed for recession. Be prepared for such a slowdown.

Keep saving, keep investing, keep washing your hands.

And have a great weekend.

[continue reading…]

1. A US regular: https://www.finra.org/ [↩]

What caught my eye this week.

Feels like only a couple of weeks ago I was reminding everyone via Weekend Reading that shares can go down as well as up.

Actually that’s because it was on a couple of weeks ago. Twice.

I needn’t have bothered. The past ten days – and most especially the past week – has provided an exhilarating reminder that stock markets can fall faster than you can say “no, for the hundredth time, UK government bonds are not riskier than shares.”

Indeed this has been the fastest decline from a high for the US stock market of all-time. UK shares are down 11% for the week, too, and the average UK pension fund has lost a whopping 5% to 6% of its value since Monday. Put that into your SWR calculator and smoke it.

Things were definitely feeling freaky by the fourth day of 3-4% declines. When the US market bounced higher into the close on Friday – perhaps on the expectation that central banks will make some sort of statement about interest rate cuts this weekend – you could almost feel the relief, even though all the main indices still ended the day in the red.

UK government bonds, for the record, are up.

Unstoppable

Just in case you’ve been living in a bunker – which is where we’ll all be in a few weeks, according to some – the cause is the novel coronavirus. COVID-19, as we groupies have started to call it.

This pesky not-quite-a-critter has been causing traders to second-guess their portfolios since it came onto the radar early this year. Only a few weeks ago I spoke with The Accumulator and revealed that I’d moved to my largest ever cash position in my portfolio, naughty active trader that I am. But in case that sounds clever, know that I’d halved this horde by the middle of the month when I saw the log graph of Chinese infections flattening out and thought, like many, that the end was possibly in sight.

Oops!

Below are two resources I’ve been glued to for weeks. You can take what you want out of the data they present – squint and it’s still possible to be optimistic – but for me that’s the beauty of them. Just the facts, ma’am:

• Coronavirus COVID-19 Global Cases by John Hopkins CSSE

• Worldometer’s COVID-19 case tracker

I’ll keep checking in with those sites, but I suspect we’re in new phase now.

Everything changed for me (and many others, it seems, given the market sell-off) when it became clear that Italy had a major outbreak on its hands, almost overnight.

Italians are a warm, sociable, and tactile people with a beautiful country that people like to visit. I felt it was potentially game over for containment after that.

I won’t bore you with too much of my poundshop epidemiology. Suffice to say I have come to see the logic behind medical views like this:

Lipsitch predicts that within the coming year, some 40 to 70 percent of people around the world will be infected with the virus that causes COVID-19. But, he clarifies emphatically, this does not mean that all will have severe illnesses.

“It’s likely that many will have mild disease, or may be asymptomatic,” he said.

As with influenza, which is often life-threatening to people with chronic health conditions and of older age, most cases pass without medical care. (Overall, about 14 percent of people with influenza have no symptoms.)

The whole article is worth a read if you want to know more lore about COVID-19.

Incalculable

Perhaps the coronavirus will be with us for a year or longer, until it burns itself out.

Three months ago it didn’t exist in humans.

What does this mean for the world, for its economy, and for the future earnings of companies?

Markets are not falling because teenage traders are scared witless of a bogeyman. This seems much bigger than SARS and much deadlier than swine flu. To my mind the declines are a rational response, as investors try to discount three aspects of this health scare:

• The economic cost of the disease and death it causes.

• The economic cost of the attempt to avoid that disease and death.

• A bonus uncertainty discount because this situation is novel and we don’t know how exactly different companies and sectors will fare.

Only a market actually has any hope of figuring this out, because it’s so darn complicated.

For example, people may think it’s a practical idea to close airports and send everyone home from work. But that would have a massive economic impact, with long-term consequences.

Tax receipts would be lower, for instance, and so spending on other deadlier illnesses stretched. The supply of food, drugs, and other essentials would be disrupted. You might kill hundreds of people out of sight in an effort to avoid a couple of hundred people catching COVID-19 and a dozen dying a month before they would have anyway.

This is a nasty virus and any death it causes is a tragedy for that person and their friends and families. We should take reasonable steps to slow it.

But look at who is most likeliest to be killed by the virus1:

Source: Worldometers

The blunt economic truth is many if not most of the small minority (c.2%) of infected people who may ultimately be killed by COVID-19 would probably have died of something else before too long, anyway2. It’s horrible to think in these terms, but this is exactly the sort of choice governments are forced to make when deciding how to respond.

It’s also what the market is trying to guesstimate. Actual deaths will probably not be too insanely disruptive in a strict economic sense, even if it becomes a pandemic. (Most of its victims aren’t working, and most of their consuming is done.) But trying to slow the rate of deaths could still cost global GDP at least a trillion dollars, according to one estimate by economists today. That’s a high price to pay for something that may not even be effective.

Singapore and China have seemingly had some success in containing the virus. However it’s hard to imagine Western populations following their protocols.

Slowing down the rate of transmission could get us to a vaccine with fewer COVID-19 deaths. That would be desirable, notwithstanding my earlier comments about unintended consequences.

But keep in mind this kind of virus mutates. So a vaccine may not be fully effective, and would probably need continual updating. Or it may arrive when the virus is close to extinguishing itself anyway, and ultimately be of little practical use.

Unwavering

To my mind then the market declines have been orderly and pretty logical, in the face of the potential disruption. Outside some extremely expensive-looking glamour stocks and some clearly threatened individual sectors (especially tourism), most markets have declined by about 10-12%. Sectors have similarly declined about 10-12%. Everything has de-rated a notch, in other words, mostly from high levels.

The market seems to be saying we’re all in this together. Not quite the spirit of Brexit Britain or Trump Towers, I understand, but probably true. So its best response is to knock a year or twos of profits off the spreadsheet and wait to see if there’s a reason to put them back on, or else to get more aggressive.

So much for the wisdom of crowds. What should individual investors do?

I can tell you what investors have been doing, which is trade. Retail investor favourites like investment trusts plunged on Friday morning before recovering as the day went on. And in the US, Friday saw the first ever $100 billion trading volume day in a single security – the S&P 500 ETF with the ticker SPY.

As I noted on Twitter on Friday morning:

At least one UK broker/platform seems to have frozen with today’s torrent of selling and is currently unable to execute trades. 2008 vibes. Please don’t panic. There are bad scenarios but there are also many scenarios. Hopefully your diversification is working. Take a breath.

In the follow-up I was asked what somebody should do if they were 10% down.

The midst of a panic is the wrong time to be asking yourself this question. I replied:

If you’re a very rare trader with edge, you’ll act according to your strategy.

If you’re one of the majority of traders with no edge, this volatility may be revealing. Go passive.

If you’re a passive investor, don’t become an edge-less trader in a panic. Stick to your plan.

— Monevator (@Monevator) February 28, 2020

I understand it is easier said than done. Passive investing has delivered tremendous gains over the past decade, but when markets fall it can feel like you’ve set up your sun lounger in front of a combine harvester.

But weeks – or months or even years – like this are part of the deal when it comes to risk assets. We wouldn’t get those great returns without pain along the way, because if there was no pain then everyone would be at it and the gains would go away.

So stay calm. Stay diversified. Remember we’re playing a long game.

And have a great weekend! With a bit of luck the sun will come out soon. A bit of Spring might slow this thing down, if and when it takes off here.

More on Covid-19:

• Yes, it’s worse than the flu: Busting the coronavirus myths – The Guardian

• Fear and influenza: How viruses spread – A Wealth of Common Sense

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1. From the site: This probability differs depending on the age group. The percentage shown below does NOT represent in any way the share of deaths by age group. Rather, it represents, for a person in a given age group, the risk of dying if infected with COVID-19. [↩]
2. Barring a mutation into something nastier. [↩]