Coronavirus Outbreak: 5 Questions To Ask Yourself If You’re Investing In Stocks

I started a recent article with the sentence: “It’s an understatement to say that stocks have been volatile of late.”

From 14 February 2020 to 8 March 2020, the S&P 500 in the US has declined by 12.1%. I mention the US stock market because it is by far the largest in the world. I’ve never thought it makes sense to find reasons for the short-term movements of stock prices. But I think it’s pretty clear that the coronavirus, COVID-19, is the key reason for the declines seen in recent days.

The number of people who are infected with COVID-19 has been rising significantly, with the death toll tagging along. The virus is also making its way into more countries over time.

Global corporate giants such as Apple, Visa, and Mastercard have warned of pressures to their businesses because of COVID-19 (see here, here, and here). Airlines are some of the worst-hit groups of companies, with UK airline Flybe entering bankruptcy earlier this month; last week, Southwest Airlines in the US warned of a “very noticeable, precipitous decline in bookings.” In China, the PMI (purchasing managers’ index) for February 2020 came in at 35.7, the lowest seen since tracking began in 2004 (a reading below 50 indicates a contraction in factory activity). In 2008 and 2009, during the height of the Great Financial Crisis, China’s PMI reached a low of 38.8.

We’re clearly in an environment now where stocks are volatile and the world is grappling with a public health crisis and recessionary fears. Many of you are likely wondering what you should be doing now with your investment portfolios. If you invest in stocks, I think there are five questions you should always ask yourself. But they are even more prominent now given the current situation:

1. What is my investing time horizon? If you’re investing in stocks with capital you need within the next five years, it’s always dangerous to do so. The danger is amplified given the current situation. Stocks are volatile over the short run, sometimes without reason. But over the long run, stock prices reflect business fundamentals and have delivered great returns.
2. Do I have a sound investment framework? An investment framework guides the way you select your investments. I have my own personal criteria to find businesses that can grow at high rates over a long period of time. It has served me well for nearly a decade. But that’s not the only way to invest. Do you have a framework that is based on sound investing logic? If you don’t, it’s always a dangerous time to invest – doubly so, now.
3. Do I have a sound investing plan? An investing plan is like an investing schedule – it guides us on when we put money to work in stocks. Some investors prefer a dollar-cost-averaging strategy, where a certain amount of capital is invested in stocks at regular intervals. That’s fine. Some prefer to be fully-invested at all times. There are also others who prefer to have a cash cushion that they will deploy depending on the magnitude of the market’s decline. These are all fine too. There are two crucial aspects to an investing plan: (1) Does it fit our temperament; and (2) does it make investing sense? If the first aspect fails, it does not matter how good our plan is – we will not stick to it. The second aspect is important for self-explanatory reasons. 
4. Do I have a basic understanding of market history? Knowing what has happened in the past can give us context for what to expect next. It can also prevent us from panicking when stocks decline. Some critical information to know include: (1) How often do stocks decline? (2) How have stocks performed over the long-term through recessions? (3) Are short-term declines common even when stocks climb over the long run? I have shared these things before and they can be found here and here.
5. Do I understand my own investing temperament? How we react to market declines can have a tremendous impact on our returns as investors. The investors of legendary fund manager Peter Lynch made only 7% per year despite him producing an incredible annual return of 29% for 13 years; that’s because Lynch’s investors had poor temperament, selling quickly whenever there was a short-term decline in his fund. If you know you have a poor investing temperament, then set up an investing plan that can save you from yourself.

These questions won’t guarantee that you will come out ahead when the COVID-19 crisis blows over. But I’m sure they’ll greatly increase your chances of success.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.