Original date published: March 1, 2020
I am getting a lot of questions regarding the effect of the coronavirus on markets. I still stand by my last newsletter that any correction or effect will be short-lived. In fact, I am using this correction to get rid of any excess cash in my portfolio, and so should you. Statistically holding cash almost always lowers your return. The longer your cash is in the market the better you will be. I have used my small cash position to buy more of my existing positions that have fallen the most. These generally bounce back the most once a recovery takes hold.
Historically pandemics or other end-of-the-world events have only temporary effects on the market. Some examples are Sars and H1N1 – no impact on the market over the long run. Want something bigger? How about the Spanish flu in 1918… it wiped out 100 million people when the world population was much smaller, and again, limited long-term impact. Related events are Y2k….yawn, even 9-11 caused some serious panic, but the market recovered quickly. Same with ww1 and ww2. If anything, this is an opportunity to cash in on people’s fears by buying the perfectly good companies that people are panic selling. Investing is for the long run, not the short run.
The other view that no one is talking about is that the market was sort of due for a correction anyway. 2019 was a strong 32% return, and the beginning of 2020 added another 5%, so the market just may have been looking for an excuse to let some air out. Corrections in the 10% range happen every year or two, and corrections in the 20% range happen every 2-3 years, so we are likely experiencing a very normal event. Could I be wrong? Of course, but the probability is on my side, and it rarely ever makes sense to bet against the odds.
Note that my sp500 call option has gone from +20% to – 30% in about a week or so. It expires in December, so lots of time to recover. It shows how quickly things can change in the options world. It represented only 7% of my portfolio. I chose a small amount just in case I was wrong or simply unlucky, so its down effect is measured, ie I was not arrogant by making a big disproportionate bet.
My portfolio is all of a sudden returning -8% year to date in constant dollars vs -8.5% for the sp500 index. Even with the extra drag of my call option, I am slightly beating the market. How you do against the market whether in an up year or a down year is the only game that matters. You should think of the market’s gyrations, whether up or down, as simply noise, and it is normal.
For the benefit of others, I have been looking into a simple index ETF for a friend that provides simplicity and market-like returns. I have come up with Ishares Core MSCI World UCITS ETF USD (Acc). It’s a world ETF that tracks the msci worl index, it comprises the biggest developed countries. These include the USA, Japan, Europe, etc… This particular ETF is based in Ireland, so no US withholding taxes apply, low management fee, and it is a very big fund which is great for liquidity (you can sell it quickly if you need to). If you want simplicity with just one position, this would be it.
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