How Will the Coronavirus Affect My Investments?
The stock market encountered a historic tumble today (dropping more than 3% for most of the major averages) as fears of the global pandemic coronavirus spread across the world, leaving investors with doubt and fears of their own. The virus first identified in early December has grown and spread across the Earth with little sign of slowing down. Over 2,100 people have reportedly died from the coronavirus so far and this number climbs each day.
Keep reading to learn how the coronavirus could affect stocks, how to minimize your risk, and how some traders are seeing opportunity in the market turmoil.
What started in the transportation sector has now spread similar to the virus itself, to anything and anywhere in between. You’ve probably heard of many companies that operate or have pieces of their supply chains in China now setting lower guidance for the upcoming quarters as production slides and sales dip. The coronavirus can affect stocks and other investments in many different ways detailed below.
Supply Chain Issues
For American companies, one of the largest impacts the coronavirus is giving rise to is supply-chain complications. China has become a worldwide leader in manufacturing, even if it’s not the final product. Many components will use Chinese manufactured parts, which can limit production of the final product.
For example, a product like a KitchenAid Stand Mixer may not be entirely produced in China, but the components required to produce the mixer might be sourced from Chinese companies. Because China has closed many factories where the outbreak is problematic, some of these components might not be available, causing the entire unit not to be produced.
For many companies, their supply chain will include several different options if their primary supply chain is limited or cut off. When switching to their next source, there can be a delay as well as slightly higher costs. Neither of which will help a companies bottom line.
If a firm operates in China, many stores and factories have been closed in areas where the disease has been known to exist. For companies like Starbucks, this means that any coffee shops located in these areas will be shut down for the near future. In turn, this leads to lower sales and therefore profits.
Employee Sickness & Absence
For those with operations in China, employee sickness has led to decreased productivity for many companies. Companies that remain open throughout the outbreak have recorded an increase in employee absentees.
Whenever a firm is valued, the valuation is essentially measuring the present values of its future cash flows. No-one can predict the future cash flows of a firm, therefore investors will estimate what they think will happen based on previous performance and the firm’s growth potential. If you project the cash flows for a company over the next 10 years, you can determine the value it should be worth today, and invest accordingly. Every time a company reports its quarterly earnings, you can then adjust the value of the stock. If a company misses on it’s earning, it’s probably worth less in your book, and the stock price will suffer. Adversely, if a company reports better than expected earnings compared to your estimates, then it will be worth more than the stocks current price and it will inflate accordingly.
The factors above point to lower revenue and profits, which will have a negative impact on the stocks price.
Stocks aren’t the only investment that have taken a hit because of the spread of this deadly virus. Bonds and other securities have also slid. Because of the poor economic outlook, government bonds have plunged over the past few weeks, hitting new record lows.
The best way to minimize the coronavirus effects on your investments is quite simple, diversification. Keeping your exposure to Chinese companies low can have positive short term effects on your holdings.
As mentioned above, one of the best ways to minimize the negative consequences of the virus is to limit your exposure to companies with operations in areas where the virus is rampant.
There is one caveat, however. Because the virus is still spreading, it may become difficult to decrease exposure if the virus is capable of spreading to the United States and other countries. You should instead look for stocks that are well diversified themselves, like Pepsi Co or 3M.
Opt For Investments Other Than Stocks
Another way to minimize your exposure to the coronavirus is to get creative with your investing. If you are limited to stock, bonds, and mutual funds, you might want to consider alternative investments like real estate or private sector investments. These investments can offer more control, giving you visibility into the day to day operations and the ability to minimize your risk.
Don’t Play With Market Volatility
The top way to mitigate risk when it comes to investing is to increase the duration of your investments. That means holding your stocks for longer will give you a better chance of gaining a positive return on your money.
Some investors have decided to take advantage of what they believe to be a short term economic problem by purchasing shares of their most valued companies at a discount. With many stocks tumbling anywhere from 2 to 10% over the past 7 days, investors seek this opportunity to lower the dollar cost average of their stocks.
When deciding whether or not to take advantage or sit on the sidelines during this rollercoaster ride, there is one thing you should consider. You don’t know what you don’t know. Some might believe the coronavirus will be short-lived and the economic will be only short term. Others might believe the effects of the coronavirus to be longer-term and might lead to more serious economic impacts. Either way, both forms of logic are essentially guessing.
Our advice? Unless you want to gamble with your money, only invest in positions that you plan to hold long term. You need to be okay with losing positions before investing. If you can afford it, this might be a good opportunity to get into the market at a discounted rate.
Should I Sell My Positions to Prevent Future Losses?
Whenever a market selloff occurs, you might be tempted to join in to prevent future losses. This is the exact opposite of what you should do. Unless you cannot afford to lose the money you have invested (in which case you should not have invested in the first place), you should try to hold your positions and even consider adding to them.
Selling your positions at a time of enhanced market volatility will set your portfolio up for disaster. You should plan for volatility because it happens often. Guggenheim Funds found that since 1946, market pullbacks (declines more than 5%) happen 1.5 times annually while market corrections (declines more than 10%) occur .5 times per year(or every other year). By understanding this before investing, you’ll be less likely to sell at the wrong time.
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The coronavirus has had a global impact on our health, and as it continues to spread, it has created a global economic fear for investors. There are many ways companies could be impacted by the virus, from supply chain complications to store closures and employee sickness, but upcoming earnings and company guidance should give us some answers as to the true economic impacts of the coronavirus.
You can try to minimize your exposure by investing in companies with limited operations in affected areas or by diversifying your portfolio into other types of investments, but the best way to maximize your returns is by giving them time.
How have you managed your portfolio throughout the coronavirus fears? Comment below!
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