What Can We Learn About Investing From the Coronavirus?

There are some good lessons about investing lurking in the underbrush surrounding the coronavirus. The most prevalent emotion on wide display during this crisis has been fear. Fear impacts almost every decision we make, including those relating to money.

The coronavirus has laid bare all of our innermost fears about the worst possible outcomes for ourselves and our families. We have mountains of information and data, but precious little certainty. As is often the case with financial decisions, choices during one timeframe can be difficult to undo in another. We sometimes have to make decisions without the luxury of time which adds yet another layer to our anxiety.

Fear and Panic

Fear and its acute form, panic, tends to “freeze up” our ability to make decisions. When we are faced with hard choices, we often delay the decision hoping to gain more clarity and certainty in the meantime. The problem is certainty doesn’t exist in the real world. As we sometimes tell clients, “no decision is a decision.”

One current example of a delaying decision can be found in the almost $1 Trillion that has moved out of stock funds into money market funds since the market top on February 19th. Many investors falsely believe that waiting on the sidelines until some particular time (e,g. when a vaccine is introduced), is safer than staying invested. The evidence doesn’t bear this out. Those investors who fled the stock market 2+ months ago missed a significant (around 30% at this writing) rebound that will be very difficult to make up sitting in money funds yielding less than 1%.

Health, Wealth and Safety

Fear manifests itself in many ways where our health and wealth are concerned. Likely owing to the dramatic uptick in anxiety about the immediate future, the personal savings rate in April rose to 13% of income (according to the Federal Reserve Bank of St. Louis), a level not seen since 1981. Both the desire to increase savings and mitigate risk by pulling $ out of stocks go hand in hand at present.

The coronavirus has caused people to seek ‘absolute safety’ even though ‘absolute safety” doesn’t exist. Many investors search for the very same thing. It’s impossible, however, to perfectly engineer our lives so that we avoid all risks. We have to be willing to accept reasonable risks in all areas of life in order to protect our lifestyle…our way of living.

Are You Putting Yourself at Greater Risk?

Often, acting upon fear doesn’t move us away from danger but actually puts us at greater risk. Investors that exited stocks a couple months ago thinking they were moving to safety missed the best month in the broad stock market in 33 years during April. As author Annie Duke said recently, sometimes “you want to protect yourself from yourself.”

Within the current environment we all crave clarity and certainty but are mostly faced with wide ranges of possible outcomes. In matters of both health and wealth, my advice is to look more to actual history than to forecasts. History can inform our expectations and provide a vision for the path ahead without any pretense of precision. Start there.

Related: Are You Still on Track to Create a Sustainable Financial Future?