A Few Ideas On Protecting Your Portfolio Against The Coronavirus

Summary

• The coronavirus scare is grabbing headlines and more than grabbing the attention of investors.
• There is the risk of lower economic growth around the globe. We already see reduced economic activity in some areas.
• If things get real bad on the human tragedy scale, we could even move into a deflationary environment.
• That said, viral scares are usually quickly dismissed by the stock markets.
• Perhaps COVID-19 will have the final say with respect to the markets.

Hopefully you were prepared for coronavirus several months ago, and several years ago. We should always be prepared. There's always something coming. We just never know what it is, what it will be called, and where it will come from. And not to discount the human tragedy of coronavirus. It's real and certainly the human side of the story is more important than money, and portfolios.

But these scares offer a friendly and courteous reminder. And they come with regularity. This list is courtesy of David Rosenberg of Rosenberg Research and Associates.

• 2010: Double-dip recession risks

• 2011: U.S. debt downgrade

• 2012: Default risk among Europe’s “PIGS” (Portugal, Italy, Greece and Spain)

• 2013: Markets have a “taper tantrum”

• 2014: Ebola outbreak

• 2015: Oil price plunge, energy recession

• 2016: Chinese currency devaluation, emerging markets turmoil

• 2017: First year of Trump presidency

• 2018: Fed overtightens, yield curve inverts

• 2019: U.S.-China trade war

• 2020: Coronavirus

Investors should always be prepared for the next big one. Once again, it’s time for a gut check. Are you investing within your risk tolerance level? If you need to take steps, we’ll look at what you can do to shore up your portfolio.

Once again, there is nothing more important than our health. Wealth is nothing without health. We all feel for the citizens of China and those affected around the world. Let’s hope the suffering is contained as much as possible.

These events cause stress to all. That stress can be exacerbated as folks look at their portfolios and read the investment headlines. It looks like scary stuff.

It is real, and scary.

From CNN Business:

Of course the "mask shot" is standard practice.

But usually the market ignores health scares. Let's see what has happened to US stocks in past health scares and events.

We only see one six-month period in which stocks remained negative. There were two 12-month periods when stock remained negative. The returns are largely very generous. Stocks mostly go up. Most years are positive. They do not appear to get knocked off track by viral outbreaks and hysteria.

But of course the coronavirus (COVID-19) will have the final say. The global outbreak with which we might compare COVID-19 is SARS. The market in 2003 only fell by about 4% and it quickly recovered. It then went on to nice gains. We've already surpassed that level of pessimism. The markets are down some 9% over the last several days. Here's the five-day chart for the S&P 500 (IVV).

What will it do to wreak havoc among populations? We already see the effect on economies and companies as expectations are lowered. The markets may continue to fall; that looks likely. But no one knows for sure. We can quickly grow tired of any news story.

Some will even say the "fear mongering" is exaggerated. It currently does not even pose a threat that rivals the typical flu, many will write. But what scares us is that we do not yet understand COVID-19 and what makes it tick.

What should you do?

Do nothing. Stay the course.

Quite often the best course of action is no action. If you’re investing within your risk-tolerance level you are already prepared for a 10%, 20% or 50% stock market correction. More important, you and your portfolio are prepared. You don’t have to prepare your portfolio for the coronavirus.

Keep on keepin' on.

De-risk your portfolio.

I often write that these love taps from Mr. Market are a courtesy. They give you the opportunity to assess your risk-tolerance level and act if necessary. I get the opportunity to remind readers every year or so. From Seeking Alpha, early 2018:

Mr. Volatility is asking you, so you wanna go?

Often Mike Tyson will step into the ring for those posts. The key message here is: Don’t wait until you get punched in the face. Take that opportunity to put yer dukes up after a friendly body shot. How did that 9% feel?

Bonds are certainly the go-to asset when managing stock market risks. How many do you need?

And keep in mind not all bonds are the same. Many types of bonds punch above their weight with respect to managing stock market risk. There’s nothing better than US long-term Treasuries and mid-term Treasuries. Many will write that the only better risk manager is an inverse-market ETF.

Treasuries do their thing.

Here’s a one-month chart for long term treasuries, via iShares (TLT). I am certainly glad I started to eat my own cooking with respect to US Treasuries. They've been 'doing their thing'.

They're up about 5.6% for the month. It can be reassuring to open up the portfolio page to see something performing very well.

My Canadian bonds have held steady more than delivered price gains. Here’s the one-month chart for iShares XBB.

And of course that disaster insurance known as Gold has been shining.

Image by PublicDomainPictures from Pixabay

Here’s the 1-month chart for the SPDR Gold ETF (GLD). It's up over 4%.

Over the last year gold is up over 24%. It has weakened recently. That is likely due to profit taking to enable many to pay the tab on margin calls.

And if you do want to prepare for the worst, in any deflationary spiral here’s what works according to The Balance. Who knows if things will get 'that bad'.

The best investments during deflation include long-term bond funds, zero-coupon bond funds and sometimes dividend stock funds. Investment classes that may not work in deflationary periods, with some extreme exceptions, include precious metals funds and money market funds.

Gold would be on the side of the ledger of things that do not work in a deflationary environment. So, as many advise, we do have to be careful about the allocation levels of our risk managers. It can be tricky business building the all-weather portfolio. In the moment, gold seems to make sense as that disaster insurance.

Ray Dalio of Bridewater starts with sensible diversification that many of us already practice.

Simple diversification.

…. the best investment strategy is to diversify across geographic locations, asset class and currencies to protect against the unknowns.

- Ray Dalio

If you are taking steps to prepare your portfolio for the coronavirus you might look to past outbreaks. We land on sensible diversification, good bonds and gold.

Don't let fear rule the day.

As an investor fear is the enemy. We should not be scared. If you're in the accumulation stage lower prices are good. They can be great. Don't be scared. Keep investing. Market corrections are healthy. It's like weeding the garden or pruning a tree. Corrections allow you to buy bigger dividends, accumulate more shares, and own more of the current earnings. It's a quick (and sometimes needed) PE ratio reset. Many will argue the US market could use a good dose of this.

If you're investing within your risk tolerance level, no problem: you can add monies on a regular schedule to the asset in need. You can re-balance on the fly. With any major moves in asset prices a rebalancing may be in order. You're investing to plan.

If you're in retirement, you should have already taken care of that sequence of returns risk. You protect your stocks with bonds and cash and other assets. And sure, you may have the goal to live off of the dividends. Many Seeking Alpha readers appear to go that route.

Either way, this should not be your first rodeo. And you and your portfolio should be prepared for market corrections, and coronavirus.

Author's note: Thanks for reading. If you liked this article, please hit that "Like" button. Hit "Follow" to receive notices of future articles.

Dale

Analyst’s Disclosure: I am/we are long BNS, TD, RY, AAPL, BCE, TU, ENB, TRP, CVS, WBA, MSFT, MMM, CL, JNJ, QCOM, MDT, BRK.B, WMT, TXN, PEP, LOW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Please always know and invest within your risk tolerance level. Always know all tax implications and consequences.