The Coronavirus should be taken seriously, but, nonetheless, the investment implications are difficult to determine. Some commentators have said that in our consumer-driven economy it all depends on the ultimate reaction of the consumer whose confidence may be shaken. But when it comes down to it, we simply do not know what it is that we do not know, and the outcome does not lend itself to the probability estimations upon which academia has told us we must rely.
The probable does not provide much help when it comes to handling the improbable. We easily fall victim to what Sam Savage calls "the flaw pf averages," viz., "...that plans based on assumptions about average conditions usually go wrong. " And we resort to guesswork, pattern recognition, and sharing experiences because that is all we have when faced with Knightian, radical uncertainty.
Flexibility reveals its value, and we must learn to "dance upon the feet of chance." (Nietzsche) Certainly, "reckless conservatism" (Steven Wendel) is suspect and investing as though preparing for the worst is unlikely to produce the best results for investors who most need to accomplish long term success--really serious and long lasting market declines are rare, And, as mentioned by Ed McCarthy in his journal article reviewing the 2000 crash (an article listed on the Coronavirus site), "...we owe it to our clients to avoid becoming part of the herd."
"investing, in anything, is first and foremost an act of faith."-Thomas Twombly.
Is it any wonder that if panicked selling is to be avoided and emotional responses assuaged we must first keep the faith and find the sources of fundamental optimism within ourselves. We may need to be comforted in order to provide comfort. And the need to huddle together around the fire may be necessary in order to allow us time to come to our senses and proceed with confidence. Humor can also be a mighty weapon in providing an expedient delay allowing the chance for reappraisal. The primary response to panicked callers may be that of simply listening, or providing empathy, and require little in the way of economic analysis or historical perspective. (But for a good presentation of historical perspective see the attached.)
"That's what diversification is for. It's an explicit recognition of ignorance." – Peter Bernstein
Finally, a financial planning perspective is helpful. The client is the benchmark and perspective is provided by the plan itself, the established investment policy it contains, and its commitment to ongoing monitoring, review, and flexibility. In the face of unknown unknowns, diversification is truly the answer, taking defensive measures may be justifiable and well considered or refused, and turning the client's focus upon her "future self" may be all that is needed,
Please join the conversation in the Coronavirus community and tune into our next Investment Planning Knowledge Circle on March 25 for
A Fireside Chat with Rick Kahler