The Corona Virus and what to Expect from it’s Impact on your Investments.

Marc Anselme CEO Anselme Capital

Let’s start with this site which provides with the geographic spread of the disease and the number of victims, updated throughout the day. This article is also particularly helpful in providing an expert perspective about the epidemic. And here is a panel of public health, economists and government policy experts at University of Chicago. Pandemic or not, I know three things with a high level of certainty:

1. The containment efforts put a break on human interaction, which means a reduction in consumption, as well as production. That is a break on economic activity. Most likely that is enough to slow down the world economy and to send into recession the countries that have already been on the verge of a recession (Japan, Germany).
2. It is absolutely impossible to anticipate events faster than the horde of analysts worldwide who are turning every stone, considering every scenario and in the process make the prices of the securities you hold in your portfolios.
3. For a hit with such a high level of emotional content: breathing masks, death, invisible disease, markets almost certainly are subjected to speculative overshoot. The shifts in valuation in the heat of moments of panic is often overdone, larger than the expected economic impact.

So what do we do? We prepare for it in advance. How?

1. By systematically diversifying your portfolio. We use an optimization over a 20 year period so that various types of shocks can be taken into account. Keep in mind that even a systematically diversified portfolio is still subjected to shocks, we are only trying to minimize as many shocks as we can. We still have to be prepared to live with shocks, particularly in the short term. As your time frame becomes longer, most shocks will be digested.
2. Pick a portfolio that fits your risk profile, regardless of how the stock market currently “feels” to you. When you assess the volatility that you can take, remember that some shocks simply can not be anticipated. In general, the longer your investment time horizon, the more volatility you can afford to take. Also, the richer you are the more volatility you may be able to afford.

We try to avoid two toxic mistakes

1. Let greed or fear guide you toward ever more speculative assets when times are good, or out of the markets altogether when times are bad.
2. Let your emotions fool you into thinking you can anticipate markets and time them. You can’t.

As far as the AC family of portfolios you are all invested in, the following happened in the last few days:

AC100 (our all stock portfolio) fell but substantially less than the S&P. This is in large part due to DFREX, the US real estate index which has a very moderating influence (steady rents). AC80 and AC60 fell also but much less, the long bond position (SPTL) jumped up and that compensated for some of the equity drop. Bonds like bad news, and long bonds LOVE bad news. So effectively, yes our optimization efforts led to portfolios that shine (relatively) in the current shock.

Perhaps you want to know how to take advantage of the current market fears?

1. Buy, in particular the asset classes that are hit the hardest. If you have been waiting for a moment to enter the market (which you shouldn’t do), this could be it. And yes I know this is hard to do.
2. Check mortgage rates. The current fear has been pushing long rates lower (and long bonds higher) so that you may be able to refinance at an interesting rate.

Be steady, be cool.

Marc Anselme